Investors this week have yanked $3 billion out of the iShares
MSCI Emerging Markets Index Fund (NYSEArca:EEM), as well as money
that canvass relatively risky pockets of the investment universe,
such as high-yield debt, amid heavy selling in the past few days,
especially in Japan.
Indeed, the Nikkei fell almost 6.5 percent on Thursday, as
concern about the possibility of rising interest rates globally
sparked selling of riskier assets, and brought the yen's historical
role as a safe-haven currency rushing back to the fore. That, in
turn, has sparked outflows from yen-hedged ETFs such as the
WisdomTree Japan Hedged Equity Fund (NYSEArca:DXJ), the
best-selling ETF in 2013.
The contradiction at the center of the sell-off is that the U.S.
economy continues to show signs of a slow and steady recovery. But
it's precisely that type of good news that raises the possibility
of the beginning of the end of the Federal Reserve's ultra-easy
monetary policy that has prevailed since the crash of 2008. The
prospect of higher borrowing rates, in turn, engenders fears in
both stocks and bonds.
The benchmark 10-year note is hovering around 12-month highs at
about 2.2 percent, up from about 1.64 at the beginning of May amid
some Fed talk that the easy-money era may be growing long in the
tooth, particular in view of data such as the latest weekly
first-time jobless claims, which came in Thursday at a five-year
U.S. stocks rose on the news, largely unaffected by Japan's
sell-off, with the S&P 500 Index ending nearly 1.5 percent
higher on Thursday. On Friday, the S&P was down about 0.35
percent as the shakeout continued.
In that context, EEM has bled about $3 billion in assets under
management this week, according to data compiled by IndexUniverse-a
sign investors are worried that growth in the developing world
might be hurt if higher rates come to pass.
Interestingly, the Vanguard FTSE Emerging Markets ETF
(NYSEArca:VWO) has lost no assets in the same period, a reflection
of the buy-and-hold bias of many Vanguard clients compared with
those who hold EEM, which are more often institutions.
Bond ETFs have also suffered redemptions in recent days, with
the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca:HYG)
losing about $230 million in assets in Wednesday's session alone.
Junk bond prices are likely to fall relatively sharply compared
with other bonds, as they are riskier.
Japan And DXJ's Challenge
The dynamic in global markets is, of course, a bit more
complicated than just a strong U.S. economy creating head winds,
though that is a big driver.
On May 22 of last month, for example, Fed Chairman Ben Bernanke
indicated that quantitative easing may begin to be curtailed late
this year. That was the same day China coincidentally reported
unexpectedly weak data on its growth.
Those two factors were enough to send the Nikkei down 7.3
percent which, in turn, pushed yields on benchmark Japanese
government bonds up to a 1 percent threshold.
That threshold is something of an abyss, to the extent that
beyond it, the cost of financing Japan's huge budgetary deficit
starts to look problematic, even untenable.
At that point, Japan's sell-off was both the tail being wagged
by the U.S. and China, and the dog wagging the rest of the economy.
Indeed, U.S. markets followed suit with a sell-off the next day,
though the selling wasn't nearly as sharp as it had been in
Still, the lasting effect of that day is a nagging sense that
the difficulties Japan may face trying to weaken its currency and
thereby pump up its export sector might end up being significant.
To date, most of the yen's weakening has been a function of Prime
Minister Shinzo Abe's pledges about doubling Japan's monetary
"So much of this has been fueled by this 'shock and awe'
campaign by Abe," IndexUniverse ETF analyst Dennis Hudachek said.
"How much more can they do?" He stressed that actual policy moves
that would truly help address structural issues that have kept
Japan's economy in a low-growth mode for nearly 25 years haven't
The yen has fallen almost 9 percent this year against the
dollar, but it was down by nearly 20 percent about a month ago,
judging by movements of the CurrencyShares Japanese Yen Trust
(NYSEArca:FXY), a long yen-dollar cross in an ETF wrapper. The fund
has risen more than 7 percent in the past month.
More to the point, the astonishing flows into DXJ, the
WisdomTree fund that protects U.S. investors from a weakening yen,
have slowed in recent weeks and even reversed.
The fund crossed the $10 billion threshold last month by dint of
an industry-leading $7 billion in inflows and rising Japanese
But in the past few weeks, the fund's assets under management
have dipped due to outflows and a falling share price. The fund has
bled almost $300 million and its assets are at just over $9.2
billion and its price has fallen by more than 10 percent in the
Also, in Wednesday's session, DXJ's unhedged competitor, the
iShares MSCI Japan Index Fund (NYSEArca:EWJ), suffered redemptions
of about $230 million, with its assets ending the day at $11.31
billion, according to data compiled by IndexUniverse.
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