As we make further progress into the final quarter of 2012, it
is worthwhile to point out that the year has been an eventful one
in terms of domestic and global economic developments. The
markets were flooded with a variety of events from across the
globe that have led us to this uncertain time in the markets (see
4 Low-Volatility ETFs to Hedge Your Portfolio
).
Among some of the major events this year, arguably one of the
most important has been the ongoing European sovereign debt
crisis. This situation saw at least some progress thanks to an
open ended bond buying program by the ECB, although it remains to
be seen if this will be the cure to the malaise.
Meanwhile, on the domestic front, the much talked about
quantitative easing 3 (QE3) was implemented by the Federal
Reserve to improve the broad economic market (see
Long Term Treasury ETFs: Ultimate QE3 Play?
). While this could help to spur the ongoing housing recovery,
broad growth is still elusive, suggesting that the market outlook
is still cloudy.
Similar Trends Across Risky Asset Classes
Amidst all this, a closer look at the performance of the
riskier asset classes interestingly suggests that they have been
following quarterly trends throughout the current fiscal
year.
The equity markets started 2012 on a strong note as equities
across the board surged after a brief broad market slump in the
later half of last year. In fact, other riskier asset classes
such as commodities and emerging market equities also benefited
from this widespread optimism. As a result, most of the riskier
asset classes ended the first quarter in the green.
However, the tides quickly turned in the subsequent quarter
mainly thanks to lack of any concrete steps to tame the Eurozone
debt crisis and a generic slowdown in most parts of the
world.
If that wasn't enough, the U.S economy grew just by a mere
1.5% in the second quarter. This has led to a sharp increase in
volatility in the riskier asset classes across the board and
caused investors to shift to a 'flight to safety' mode.
This also resulted in the U.S Treasuries (especially the long
dated ones) witnessing a significant rally as they act as the
ultimate safe haven investment avenues for investors in these
distressed times. However, the stock markets recovered
substantially in the third quarter as investors restored back
confidence in the risky asset classes.
Also, with the implementation of QE3 in the latter half of
third quarter, the markets were flooded with liquidity. The
equity markets responded well and as expected, commodity prices
surged. Thus, most of the ETFs tracking riskier asset classes
witnessed substantial inflows in their asset base and were up as
the third quarter ended (read
Q3 ETF Asset Report: Investors Back in the
Market?
).
Thus we see that this quarterly "
Up-Down-Up
" trend within the riskier asset classes has been nothing less
than a see saw ride for the investors.
ETFs Following Similar Trends
This phenomenon is exemplified from the ETF space as well. In
this regard we have highlighted three ETFs belonging to the
typical 'risky' asset class, which track the broad markets within
their asset classes.
These are
1) SPDR S&P 500 ETF (
SPY
)
, which tracks the performance of the U.S equities,
2) PowerShares DB Commodity Index Tracking ETF (
DBC
)
, a futures backed fund which tracks the basket performance of 14
actively traded commodities and
3) iShares MSCI Emerging Markets ETF (
EEM
)
, which tracks the performance of broader emerging market
equities.
Table 1: Returns Analysis and Moving Average
|
ETF
|
Asset Class
|
1Q
|
2Q
|
3Q
|
4Q (Quarter till Date)
|
Current Market Price
|
200 Day Moving Average
|
|
SPY
|
Domestic Equity
|
12.69%
|
-2.84%
|
6.35%
|
-1.82%
|
$141.35
|
136.77
|
|
DBC
|
Commodity
|
7.30%
|
-10.59%
|
11.38%
|
-3.84%
|
$27.58
|
27.74
|
|
EEM
|
Emerging Market Equities
|
13.20%
|
-7.80%
|
5.62%
|
-0.29%
|
$41.21
|
40.62
|
4Q (QTD) Returns, ii) Current Market Price, and iii) 200
DMA as of 26
th
October 2012.
It is quite evident from the table above (Table 1) that all
these ETFs have exhibited similar characteristics in terms of
their quarterly movements, at least for the first three quarters.
This is interesting, especially considering the fact that most of
these ETFs do not have a very strong correlation among themselves
(see more in the
Zacks
ETF Center
).
Of course, the equity based ETFs (i.e. SPY and EEM) have a
strong correlation of 91% among themselves, and the similarity in
their quarterly movements is justified by their strong
correlation.
However, SPY and EEM have weak correlation of 56% and 61%
respectively with their commodity counterpart DBC. Despite this,
its movement has exhibited similar trends with the equity
ETFs.
Table 2: Correlation Matrix (using daily returns for 20
months)
|
ETF
|
SPY
|
EEM
|
DBC
|
|
SPY
|
100%
|
90.85%
|
56.55%
|
|
EEM
|
|
100%
|
61.79%
|
|
DBC
|
|
|
100%
|
What Lies Ahead?
The most important question at this point of time remains that
will the similarity in quarterly trends continue to remain across
these risky asset classes going into the fourth quarter? Or, will
they follow the trend and plunge again in Q4 after an uptrend in
Q3, just like the previous occasion?
Here are certain facts that hint towards the possible coming
path. In just about a month into Q4, all the three 'risky' asset
class ETFs have slid towards being in alignment with the
persistent quarterly trend and started showing similar signs of a
downtrend. In fact, on a Q4 quarter till date basis these three
funds have slumped, as is evident from Table 1.
Furthermore, the two equity ETFs are within striking distances
of breaching the crucial levels of the 200 Day moving Average,
whereas the commodity ETF, DBC, has already breached that level
and is trading below its 200 day MA. Thus, riskier asset classes
might not prove be a good short term play in the final
quarter.
Although we are still early in Q4, the weakness in the third
quarter corporate earnings, speculation surrounding the
presidential election, the fiscal cliff and the aftermath of the
latest
"Frankenstorm" Sandy
are sure to keep the riskier asset classes volatile in the near
term - a trait that is pretty much persistent with the second
quarter (read
Three ETFs to Watch in Hurricane Sandy's
Aftermath
).
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PWRSH-DB COMDTY (DBC): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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