As of the end of May 2015, global ETP assets stood at $2.87 trillion with European ETP assets amounting to $507bn (€463bn). During the month of May, Equity ETFs registered inflows of +€0.9bn which were offset by outflows from Fixed Income ETFs (-€0.9bn). Commodity ETPs listed in Europe saw inflows of +€0.2bn over the last month.
European equities continue to attract new money
Since the start of 2015, ETFs with European equity exposure gained significant interest, both among European and US investors. In May, we observed inflows again into European equities for listings in both US and Europe, although in a smaller magnitude compared to the months in Q1 2015. Where European listings were concerned, our analysis shows a net inflow of +$846mn (+€762mn) and for US listed ETFs we saw +$2.1bn inflows in May.
Fixed income ETFs experience outflows for the first time in 2 years
Towards the end of April, bond markets started to sell-off pushing yields back up from their all time lows amid signs of economic recovery and increasing bond supply. This was reflected in the ETP market where we saw net redemptions within the asset class for the first time in 2 years, on a monthly basis. Over the month of May, fixed income ETFs saw outflows of -€865mn. This was driven mainly by sovereign bonds based ETFs from which investors’ pulled out over -€1bn.
Dividend theme lost momentum in May
In May, Dividend ETFs saw negative flows of over -€500mn. Many of the ETFs in this category saw outflows but it was skewed by a single heavy redemption in a US dividend ETF tracking the S&P High Yield Dividend Aristocrats index, totaling c.-€350mn.
German and Japanese equities preferred over UK and US equities
Among ETFs providing single country exposure, Germany, Japan, South Korea and France saw significant activity receiving inflows of +€1bn, +€355mn, +€278mn and +€203mn respectively. On the losing side, ETFs benchmarked to UK, US, Switzerland and China equities saw outflows of -€597mn, -€530mn,-€192mn and -€116mn respectively.
TAARSS says prefer a mix of Bonds and Equities in Q2
Tactical Asset Allocation Relative Strength Signal (TAARSS) Monthly Update TAARSS says prefer a mix of Bonds and Equities in Q2
Top recommendations for April: European, German, Japanese, and Indian equities, and US Intermediate IG Credit.
Market review
Risky assets were challenged again in March with Global equities (ACWI) and Commodities (DBC) retreating by 1.5% and 6.0%, respectively. While US bonds (AGG) ended slightly positive at 0.4% as rising rates concerns eased.
Most quarterly and monthly TAARSS strategies outperformed their respective benchmarks during Q1 and March, respectively.
Tactical positioning for Q2 and April 2015 based on TAARSS
For Q2 we recommend an almost equal mix of Bonds and Equity, while limiting Commodity to a minimum allocation. Basically markets are divided, some investors are confident on growth others are not as sanguine, therefore it should pay off to be diversified. In terms of fixed income term allocations, prefer the belly of the curve during Q2, effectively lowering duration respective to Q1.
This month in global equity markets prefer Intl DM over EM, and stay neutral to the US. Region wise prefer Europe and Asia Pacific, while staying neutral to North America, and away from Latin America. In US equities prefer Small and Mid caps, while keeping Large Caps at a minimum. Sector wise Domestic Cyclicals show the best support, especially Consumer Discretionary. Defensives are mixed with Telecom and Health Care showing support, while Utilities and Cons. Staples suggesting selling pressure. Industry wise we highlight Aerospace & Defense which continues to experience very strong support. In Intl DM countries prefer Germany and Japan. Within EM countries India continues to show strong investment demand support despite the performance setback last month; similarly Taiwan has also experienced some good support. The rest of the countries seem weak. For Fixed Income prefer credit over rates, but stay within investment grade.
The equity market has been extremely focused on when the Federal Reserve (Fed) is going to raise interest rates, and expectations are consistently changing with the release of any relevant data point. Consensus is that the Fed will abandon its zero interest rate policy at some point over the next year, but the timing of this first interest rate hike has been highly debated. Even more uncertainty surrounds the rate hike trajectory and the longer-term target level of interest rates. What is not debated is the fact that many investors need their portfolios to generate income, and this percentage is expected to increase as the baby boomers transition into retirement. But with interest rates still near record lows across the globe, many investors continue to look beyond traditional asset classes for income generation. We think that they mistakenly overlook mid- and small-cap dividend payers. We believe mid- and small-capdividend payers deserve a larger allocation in most investors’ long-term portfolios—particularly portfolios targeting income strategies—for both their current income and potential growth characteristics.
In Search of Income: Look to Mid- and Small Caps
We believe that many investors mistakenly assume that mid- and small-cap companies are solely focused on growth and therefore reinvest their earnings instead of paying them out in the form of dividends. When looking at traditional market cap-weighted indexes for the United States in particular, this assumption seems to be accurate. Going down the size spectrum, from the S&P 500 (large cap) to the S&P 400 (mid-cap) and the S&P 600 (small cap), in the Standard and Poor’s index family of market cap-weighted indexes illustrated in figure 1, the indexes that focus on larger market capitalization companies have higher trailing 12-month dividend yields.
However, this does not necessarily have to be the case; there are many profitable mid- and small-cap companies that can afford to, and do, pay dividends. Market capitalization-weighted indexes provide the benefit of as broad an exposure as possible to a given universe of stocks, but they do not directly focus on dividends or dividend payers.
When WisdomTree applies its domestic dividend methodology, it includes only dividend-paying companies and then weights these constituents based on their Dividend Streams®. These elements tend to produce very different trailing 12-month dividend yields for WisdomTree’s LargeCap, MidCap and SmallCap Dividend Indexes.
Figure 1: Market Cap Weighting vs. Dividend Stream Weighting
• In the current environment, WisdomTree’s domestic Dividend Indexes turn this way of thinking on its head—the WisdomTree SmallCap Dividend Index has a yield advantage over the WisdomTree MidCap Dividend Index, and the WisdomTree MidCap Dividend Index has a yield advantage over the WisdomTree LargeCap Dividend Index.
Figure 2: Market Cap Weighting vs. Dividend Stream Weighting by Sector
• Weighting eligible companies in our Indexes by dividends, rather than by market cap, enables us to magnify the effect dividends have on performance and potentially raise a portfolio’s trailing 12-month dividend yield. Unlike weighting by dividend yield, which can concentrate weights in the highest-yielding sectors, WisdomTree’s process of being broadly inclusive enables our core dividend Indexes to remain properly diversified across sectors while also increasing income.
Another important thing to consider when investing in mid- and small-cap companies, which typically trade at higher multiples as a result of their higher growth potential, is managing valuation risk. With market capitalization-weighted indexes, when constituents increase in price compared to other stocks, they gain greater weight and increase their impact on the performance of the index.
WisdomTree Indexes employ a rules-based rebalancing mechanism that adjusts relative weights based on underlying dividend trends. During the rebalancing process, which occurs once per year for each Index, the relationship between price change and dividend growth is measured. WisdomTree’s Dividend Index rebalance process typically is driven by both:• Dividend growth: Faster dividend growers see weight increased• Relative performance:- Underperformers typically see weight increased- Outperformers often see weight decreased
Important Risks Related to this Article
Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
Chinese GDP and ECB’S QE provide a lift to cyclical commodities.
European bourses cheer on a bolder-than-expected QE programme.
Draghi comes to QE party, as focus moves to Greek election result.
Although the announcement of quantitative easing (QE) by the European Central Bank (ECB) was widely anticipated, the overall size was larger than expected. At EUR60bn a month until September 2016, the ECB will purchase more than a EUR1trn over the course of the programme. The ECB clearly wants the Euro area to move out of a deflationary mindset. Cyclical assets moved decisively higher, while gold, often seen as an alternative currency also gained on Fear of a further slump in the Euro as the ECB’s looks to boost its balance sheet. Today’s Greek Election outcome will no doubt bolster demand for haven assets as Europe contends with another period of uncertainty.
Commodities
Chinese GDP and ECB’S QE provide a lift to cyclical commodities. Chinese 2014 GDP was better than expected, warding off some of the gloom that has beset industrial metals lately. China is the world’s largest consumer of industrial metals and therefore its economic performance has a large bearing on the demand for these metals. The ECB’s moves to drag the laggard euro area economy out of a deflationary rut also acted as a catalyst to both industrial and precious metal gains. A growing euro area will bode well for industrial metal demand while fears that the euro currency will be debased by the ECB’s balance sheet expansion drove demand for gold and silver higher. With the gold to silver ratio having hit multi-year highs at the end of 2014, many investors see silver as a relatively cheaper way to gain exposure to hard assets. Arabica coffee fell 9.5% on the back of cooler weather easing stress on coffee bushes in Brazil this week. Natural gas fell 9.4% on the back of a return to milder weather conditions in US.
Equities
European bourses cheer on a bolder-than-expected QE programme. The bold and decisive move by the ECB, was met by equity market optimism, as market participants felt that the central bank had left its reticent past behind it and is willing to tackle its deflationary problems head-on. The DAX was marginally down on the day of the announcement, probably reflecting some of the German cynicism toward the risk-sharing elements of the expanded programme. Meanwhile gold miners traced the gold price higher with the DAXGlobal Goldmining Index gaining 5.9% in the week. China A-Shares had a volatile week, with the MSCI China A-Share Index falling 7.2% on Monday on the announcement of tighter regulations on margin lending and then rising 4.1% on Wednesday when better-than-expected GDP data was released. This week, US GDP figures will likely be the focal point for a market assessing the Federal Reserve’s capacity to raise interest rates.
Currencies
Draghi comes to QE party, as focus moves to Greek election result. The moves in the Euro suggest that the ECB’s new QE program surprised the market somewhat with its magnitude and timeframe. The open ended nature of the programme indicates a real commitment to doing ‘whatever it takes’, and the self determination of the balance sheet target makes the 2012 target level within easy reach. Last week’s announcement was a sharp contrast from its previous strategy which was characterised by reticence to undertake bold action. We expect that the ECB QE programme will lead to flatter yield curves across the Eurozone and that widening rate differentials will continue to weigh on the Euro against major currencies. The Greek election is the markets crosshairs this week and the Euro is likely to continue lower as concerns over Greece’s willingness to repay debtors linger ahead of the Feb 28th deadline for the expiry of its ECB funding programme.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FSA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
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Securities issued by each of the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A., Deutsche Bank AG any of their affiliates or anyone else or any of their affiliates. Each of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A. and Deutsche Bank AG disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this document or its contents otherwise arising in connection herewith.
”Dow Jones,” ”UBS”, DJ-UBS CISM,”, ”DJ-UBS CI-F3SM,” and any related indices or sub-indices are service marks of Dow Jones Trademark Holdings LLC (”Dow Jones”), CME Group Index Services LLC (”CME Indexes”), UBS AG (”UBS”) or UBS Securities LLC (”UBS Securities”), as the case may be, and have been licensed for use by the Issuer. The securities issued by CSL although based on components of the Dow Jones UBS Commodity Index 3 month ForwardSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME Indexes, UBS, UBS Securities or any of their respective subsidiaries or affiliates, and none of Dow Jones, CME Indexes, UBS, UBS Securities, or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such product.
Persistent cold forecasts drive up natural gas prices
Hopes of quantitative easing boost European equities.
Shock and awe. The SNB’s surprise moves on Thursday sent the Swiss Franc close to parity with the Euro, a 17% movement in the pair on the day.
The Swiss National Bank shocked the market by removing its 1.20 cap on the Swiss Franc against the Euro. Central banks will remain in the limelight with the European Central Bank widely expected to announce full-blown quantitative easing this week after years of resisting following the US on this path. Discussion of the modalities of the programme will no doubt drive asset price rallies – the direction dependent on how inclusive or restrictive the programme will be. Meanwhile a raft of Chinese data releases including Q4 2014 GDP will be closely observed as the market looks for further cues on where global growth will go in 2015.
Commodities
Persistent cold forecasts drive up natural gas prices. Natural gas prices surged 6.7% on predictions that cold weather conditions in the US would continue into the upcoming week. This raised market expectations of increased heating demand from the Northeast and Midwest regions of the US. Conversely, copper ended the week down -7.7% amidst selling on Asian markets spurred by the World Bank reducing its forecasts for global growth this year to 3.0% from 3.4% previously. Copper is broadly considered a barometer for global economic health due to its broad industrial applications. Finally, crude benchmarks continued to fall this week with Brent and WTI ending the week down -7.3% and -5.0% respectively as US crude inventory figures showed that oil stores are at their highest levels in 80 years . The asymmetric decline in prices caused WTI to temporarily trade at a premium to Brent, reflecting early signs that current falling prices are causing US producers to curb production.
Equities
Hopes of quantitative easing boost European equities. A ruling by the European Court of Justice increased the likelihood that a QE program will be revealed at the next central bank meeting on the 22nd January. Markets cheered the move sending European stocks higher with the German DAX rallying 1.9% in the week. The QE program is aimed at preventing the Eurozone slipping into deflation as energy prices continue to fall. Bullion ended the week up 3.6% as market volatility stimulated safe haven demand following a shock announcement by the Swiss National Bank (SNB) stating that it was abandoning its currency cap of 1.2 CHF against the Euro. The rise in the gold price buoyed the DAXglobal Gold Mining Index which finished the week up 8.3%. Both the FTSE 100 and the Solactive US Energy Infrastructure MLP Index were dragged lower by falling copper and oil prices.
Currencies
Shock and awe. The SNB’s surprise moves on Thursday sent the Swiss Franc close to parity with the Euro, a 17% movement in the pair on the day. The Swiss central bank is no doubt preparing for the European Central Bank’s (ECB’s) full-blown quantitative easing (QE) programme which is widely expected to be announced this week at ECB’s policy meeting. In contrast to the US Federal Reserve, which had trodden on this path before, the ECB will need to buy sovereign debts from many Member States. There are many questions that will need to be answered in this policy meeting: How big will the programme will be?; Which country’s bonds will it buy?; Will the ECB buy the bonds itself or delegate the task to the Member States’ national central banks? After the SNB’s moves last week, the Euro had appeared to price in a fairly aggressive move by the ECB and any disappointment in the scale of the programme could drive the Euro higher over the short term.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
Important Information
General
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FSA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
Other than as set out above, investors may contact ETFS UK at +44 (0)20 7448 4330 or at retail@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.
Third Parties
Securities issued by each of the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A., Deutsche Bank AG any of their affiliates or anyone else or any of their affiliates. Each of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A. and Deutsche Bank AG disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this document or its contents otherwise arising in connection herewith.
”Dow Jones,” ”UBS”, DJ-UBS CISM,”, ”DJ-UBS CI-F3SM,” and any related indices or sub-indices are service marks of Dow Jones Trademark Holdings LLC (”Dow Jones”), CME Group Index Services LLC (”CME Indexes”), UBS AG (”UBS”) or UBS Securities LLC (”UBS Securities”), as the case may be, and have been licensed for use by the Issuer. The securities issued by CSL although based on components of the Dow Jones UBS Commodity Index 3 month ForwardSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME Indexes, UBS, UBS Securities or any of their respective subsidiaries or affiliates, and none of Dow Jones, CME Indexes, UBS, UBS Securities, or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such product.
