2013 Market Review: The Top ETFs And What Drove Them
2014: A Look Back And Ahead
2013 will be remembered as a banner year for equity ETFs thanks to massive economic stimulus in the U.S., Europe and Japan, rather than earnings growth. But it's one to forget for emerging markets and gold, which suffered most from worries the Federal Reserve would tighten the spigot.
SPDR S&P 500 ( SPY ) delivered investors a fat 32% return, including dividends, booking its fattest annual return since 1997. The underlying index eclipsed its 2007, pre-financial-crisis high to end the year at a historic peak of 1,846. 2013 earnings are projected to have grown 5.7% year over year. Earnings in 2014 are forecast to grow nearly 11%.
Investors pulled money out of bonds in favor of the stock market as rising interest rates eroded bond prices. Bond yields, which move opposite prices, climbed in anticipation that the Federal Reserve would start tapering its $85 billion monthly bond purchases, referred to as quantitative easing.
Inflow into U.S equity ETFs in 2013 nearly doubled over the prior year, totaling a record $138.1 billion, according to TrimTabs Investment Research in Sausalito, Calif. Global equity ETFs absorbed an epic $57.9 billion.
Bond ETF inflow amounted to $5.2 billion -- the lowest amount since 2006. That marked a 90% plunge from the $52.8 billion seen in 2012. The great rotation out of bonds into equities favored Europe ETFs, which took in $21.3 billion, and Japan ETFs, which got $17.8 billion. Some $5.8 billion flowed out of emerging market ETFs.
Foreign ETFs End Mixed
Emerging markets suffered from a perfect storm of "taper tantrums" coupled with weak global demand for commodities, rampant inflation and free-falling currencies.Vanguard FTSE Emerging Markets ( VWO ), the largest ETF in its category, lost 6%.
Developing countries benefited most when the first round of quantitative easing was expanded in March 2009. Investors armed with cheaply borrowed money flocked to emerging markets in search of higher-yielding currencies and faster-growing economies.
Countries with large trade deficits -- Turkey, India, South Africa and Brazil -- that were heavily dependent on foreign investment sold off as investor appetite for riskier assets waned when the Fed indicated it would tighten stimulus.
Every country in Latin America fell by double digits but Mexico, which confined its decline to 2%. The region's biggest loser,iShares MSCI All Peru ( EPU ), plunged 25%.
Market Vectors Indonesia Index ( IDX ) sold off 23%. The country's trade deficit swelled to a record high of nearly $10 billion, seen as unsustainable, in the second quarter. The inflation rate swelled to 9%.
The flagship China ETF,iShares China Large-Cap ( FXI ), ended down 2% after a wild roller-coaster ride. The market tumbled the first half of the year on fears of an economic hard landing. A credit crunch midyear intensified the sell-off. Interest rates on overnight loans peaked at 30%, igniting fears of bank defaults. China's market bottomed after the central bank restored investor confidence. Sweeping economic reform plans announced in mid-November are aimed at boosting consumer spending and making China more business-friendly.
"Investors are encouraged by finally seeing growing high-level political consensus on reform implementation," Alec Young, global equity strategist at S&P Capital IQ, wrote in an international outlook Dec. 2.
IShares MSCI EAFE (EFA), tracking developed foreign markets, returned 20%. All European countries enjoyed double-digit gains except Norway, which gained 5%, and Portugal, up 7%. Finland, up 42%; Ireland, up 38%; and Spain, up 28%, led Europe.
The eurozone returned to growth in the second quarter after two years of recession. Low interest rates globally and record central bank money printing should fuel continued economic growth in 2014, says Ned Davis Research.
"Comprehensive measures of eurozone economic activity, such as the OECD CLI (Organization for Economic Cooperation and Development Composite Leading Indicators), EuroCOIN (a coincident indicator of the eurozone business cycle), and the manufacturing PMI (Purchasing Manufacturers Index), are at their highest levels since mid-2011," Ned Davis Research noted in a report released Dec. 12. But economic growth will be modest as unemployment remains near a record high and private-sector lending diminishes at a record pace.
WisdomTree Japan Hedged Equity (DXJ) vaulted an eye-popping 41% for the year. Prime Minister Shinzo Abe enacted unprecedented economic stimulus and yen debasement policies, which sparked export demand and inflated corporate earnings.
The government increased spending, thereby driving domestic sales, hiring and consumer spending. It also enacted reforms in pension and savings plans and industrial regulations. Bank of America Merrill Lynch's Japan equity strategist Naoki Kamiyama forecasts the island nation's stock market will rise 13% to as much as 33% in 2014.
"A recovery in corporate earnings and expectations for growth in dividends, share buybacks, and wages and an improvement in spending trends are likely to lead to structural improvements in Japan's economy," Kamiyama wrote in a 2014 outlook Dec. 2.
"The forces that drove Japanese equities in 2013, including low rates/weaker yen and the U.S. economy, should gain additional support from an acceleration of the corporate capex cycle and a populace that is more comfortable consuming and investing."
But a sales-tax increase and rapid inflation in the face of falling wages will hurt consumers, Ned Davis Research says. And despite massive quantitative easing, business spending has been declining.
SPDR Gold Shares (GLD) lost 28%.IShares Silver Trust (SLV) plunged 36%. Commodities across the board plunged owing to China's weakening demand for raw materials in the face of overproduction in shale oil and agricultural products.PowerShares DB Commodity Index (DBC) -- offering exposure to agriculture, industrial metals, energy and precious metals -- lost 8% in 2013. Contrary to what the Fed's critics claimed, global quantitative easing did not debase currencies or incite massive inflation.PowerShares DB U.S. Dollar Index Bullish (UUP), tracking the greenback against a batch of major currencies, slid 1.3% in 2013 and booked a five-year losing streak. Commodities ETFs bled $29.9 billion in 2013, with precious metals accounting for $27.8 billion in redemptions.
Bond Prices Down, Yields Up
The consensus on Wall Street declared the 30-year bull market in bonds ended in 2013. Bond yields started a renewed uptrend in May after Federal Reserve Chairman Ben Bernanke first hinted that the central bank would start scaling back quantitative easing.
Vanguard Total Bond Market (BND) dipped 2.1%.IShares 20+ Year Treasury Bond (TLT), tracking long-dated bonds, tumbled a whopping 13% -- a severe loss for a safe-haven asset.
Yields on 10-year Treasuries climbed 1.18% to end 2013 at 3.04% -- the highest in 2-1/2 years. Benchmark yields will march toward 4% this year in anticipation of a policy rate increase and tapering being completed by year's end, U.S. Trust's fixed-income strategists say.
They expect Treasuries to lag municipal and corporate bonds amid rising interest rates and growing state and local tax revenues. Corporate defaults hovered well below historic averages a fourth straight year in 2013. At the same time, companies are sitting on piles of cash and corporate debt levels are well below their 2010 peak, U.S. Trust wrote in a 2014 fixed-income outlook report.