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ETF Trends That May Not Have Hit Your Radar Screen

A do-it-yourself investor would be wise to track institutional money. Are there surprising, or not so surprising, moves that advisers make via their block trades? Often, the activity will give you the heads-up if advisers like myself are on their way to a party before the rowdier guests arrive; similarly, tracking block allocations might tell you whether or not advisers, asset managers and/or hedge fund gurus are leaving an enthusiastic celebration early to watch digitally recorded episodes of “Breaking Bad.”

For example, PowerShares Emerging Market Sovereign Debt (PCY) has caused more portfolio pain than portfolio pleasure in 2013. Fortunately, for clients who had owned PCY, we minimized loss with stop-limit orders during the May-June rout of higher-yielding income assets. PowerShares Emerging Market Sovereign Debt (PCY) had served us so well since 2009. Shortly after Bernanke’s taper talk on May 22nd, however, our mechanical and unemotional sell discipline removed the asset from our accounts. Then in September, the 10-year yield tickled 3%, while the Federal Reserve backtracked on its anticipated policy change. Ever since, yield sensitive assets have been gaining ground. In fact, for the past few days, PCY has picked up more than 100 million in assets on 2x the average trading volume.

PCY 50

Granted, there are technical traders who dumped PCY by the hundreds of millions when it crossed below the 50-day trendline back in May. So it stands to reason that many of those same technical traders have re-entered PCY… now that the asset has crossed back above a 50-day here in September. Others may be intrigued with the 5% annualized yield delivered monthly in an environment where the Fed may not slow their bond-buying after all; still others may regard the spread between emerging market debt and comparable U.S. government debt as attractive.

By way of additional disclosure, I have not added PCY to client accounts. My yield-oriented moves for clients after the Fed decision have concentrated on muni debt, including SPDR Nuveen Barclays Muni (TFI) and SPDR Nuveen Short Term Muni (SHM). I have added to held-to-maturity high yield (i.e., Guggenheim BulletShares Series) as well as senior bank loan assets like PowerShares Senior Loan (BKLN). Yet whatever the reason for the new-found interest in PowerShares Emerging Market Sovereign Debt (PCY), individual investors should recognize recent changes in institutional fund flow.

Another trend that may be perplexing to those who “value” fundamental valuations, small-cap stocks have not been this strong compared to large-cap stocks since the previous government impasse in July of 2011. The relative strength of iShares Russell 2000 (IWM) against the SPDR S&P 500 Trust (SPY) as seen in the IWM:SPY price ratio tells us that small-caps were not that concerned by rising interest rates in the 2013 May-June swoon; similarly, small-caps are not sweating the government showdowns over the budget or the debt ceiling. In fact, IWM is still a mere fraction off its record peak, whereas the S&P 500 and the Dow Jones Industrials are several percentage points below their highs.

IWM SPY Price Ratio 2 Year

Due to overvaluation concerns, I have been less willing to add to domestic small-cap exposure. We already maintain a rather significant commitment to iShares Small Cap Value (IJS). On the other hand, noting the ability of developed market small caps to “overlook” interest rate uncertainty as well as political uncertainties, I have been willing to acquire iShares MSCI EAFE Small Cap (SCZ) for growth-oriented portfolios. (Not that a 3% yield from developed market small-caps is chopped liver.) Comparing SCZ to its bigger brother, iShares MSCI EAFE Index Fund (EFA), confirms a very similar trend to the one that is taking place in the U.S. stock market.

SCZ EFA Price Ratio 2 Years

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