6 Trends Bond, Gold Refugees are Cashing In On Now

Rudy Martin

Do you want to know where markets are going? I’ll tell you how I do it.

First, I stand up and look out my window at the warm August day. Then I think about the waning baseball season and wish the NFL would get started. Then I glance at some earnings and economic headlines.

All this clears my head so I can read the numbers on my screen. They look like the table I’m about to show you. This summary of ETF activity pretty much sums up the first seven-plus months of 2013.

First, have you heard of ETF "Creations"? This means institutional investors traded individual securities for equivalent ETF shares. "Redemptions," which you may be more-familiar with, means they cashed in ETF shares and took out the assets in-kind.

When you put them together like this, you’ll easily see which asset classes are losing investor dollars — and where those dollars are going …

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Look at the top section of the table. You will see …

  • Investors stampeded out of SPDR Gold ETF (GLD) as the precious metal’s price collapsed.
  • With the iShares MSCI Emerging Markets ETF (EEM) in second place and the Vanguard FTSE Emerging Markets ETF (VWO) in fifth place, you can see this year’s rapid reversal in emerging-market stocks.
  • Massive redemptions in the iShares TIPS Bond ETF (TIP) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) reflect the migration out of bonds as rising interest rates knee-capped fixed-income principal values.

The "Creations" list shows us where the refugees from gold, emerging-market stocks and bonds went with their holdings.

The major beneficiary is the venerable SPDR S&P 500 (SPY). The granddaddy of all ETFs attracted almost $10.4 billion in new capital this year.

Next, we see two Japan ETFs, the WisdomTree Japan Hedged Equity ETF (DXJ) and the iShares MSCI Japan ETF (EWJ), that together received more than $14 billion new investor dollars. The "Abenomics" stimulus program of new Prime Minister Shinzo Abe is clearly gaining traction.

(For more on Japan’s investment outlook, see my colleague Tony Sagami’s perceptive Why the Land of the Rising Sun is the IMF’s Lone Bright Star, published July 11.)

The leading ETF cash-attractors also include the iShares Russell 2000 (IWM). This small cap ETF adds a bit of oomph to the SPY holdings.

Rounding out the top five is the Financial Sector SPDR (XLF). In many of the world’s nations, the business cycle is at a point where the financial sector gains economic dominance. (For more on how financials can sneak up on investors, see my Aug. 2 post, Is Your ‘Mining’ ETF Full of Bankers in Disguise?)

Add it all up and what do I see? Trends, of course! As I said earlier this week, "Trend" is my middle name — or at least the middle name of my Global Trend Trader service.

6 Trends These ETF Flows

Are Saying We Can Trade

Based on my decades of experience turning trends into profits, I see six distinct trends in these ETF flows.

GOLD’S COLLAPSE: In gold or any other market, you can make huge gains when a major trend reverses. My colleague James DiGeorgia is the real expert here. He says the yellow metal’s current price is below production costs at many mines. Eventually miners will cut production enough to turn bullion prices higher again.

BOND MARKET CONTRACTION: Mere whispers the Federal Reserve could begin "tapering" its quantitative-easing programs set off huge bond ETF outflows. We all know QE is NOT going to last forever. What will happen when it finally does shut down? How far down will bond prices go when the Fed unwinds its massive Treasury and mortgage-bond holdings? This trend could haunt bond markets for a long — and very painful — time.

EMERGING MARKET DECLINE: This is a tough call. Emerging markets are volatile and very sensitive to economic ebbs and flows. If Europe and the U.K. show signs of life and U.S. economic expectations improve, China and other emerging markets could turn around sooner than many expect. This trend is always under the Global Trend Trader microscope!

JAPAN: Even if the nation’s economy doesn’t fully respond to Abenomics, the worldwide pickup in auto sales I mentioned in my Aug. 7 column will help an important sector. I’m keeping an eye on Japan, too.

S&P 500 AND RUSSELL 2000: SPY and IWM, along with the indices they track, are still hitting new highs. The uptrends may continue, but other investment areas could have greater percentage gains. I look for sectors and industries with the potential to outperform the broader benchmarks.

FINANCIALS: Everything I just said about the S&P 500 and the Russell 2000 applies to the financial stocks, too. As noted above, financials can sneak in and dominate ETFs that investors bought for a completely different purpose. Nevertheless, I use financial stocks to give Global Trend Trader exposure to this crucial industry.

I’ll have all these trends in mind as 2013 winds down. Next week I’ll share another nugget from my never-ending research: three "marathon" stocks with remarkably consistent long-run results.

Happy Trading!


P.S. And if you want to get in on the specific stocks within these ETF universes that are throwing off gains as these trends gain momentum all over the world, consider taking my Global Trend Trader service for a risk-free test-drive by clicking here.