ETF Database February 11 Trends: Financial Investors Seeking Shelter Through Gold and Inverse ETFs

Prompted by volatile global equity markets, investors have been flocking to safe-haven assets, including gold, which has increased traffic to our Gold ETFs page by 131% over the past week.

Gold futures traded slightly lower Wednesday, but the SPDR Gold Shares ETF (GLD B) rose nearly 0.8% on heavy volume and is up today as well, bringing its year-to-date gain to about 16%. Gold’s Wednesday decline was the yellow metal’s first in six trading sessions and one that has some market observers speculating that profit-taking and technical factors are at play.

Gold futures closed just below $1,200 per troy ounce Wednesday, a price area that is seen as mental resistance by some gold traders. Commodities traders are also expecting gold to pull back in the coming days due to the Chinese Lunar New Year celebration. India and China are the world’s largest gold consumers.

The Federal Reserve continues to loom large for GLD and other gold ETFs since low interest rates are seen as a positive for precious metals. Should the Fed make clear that it intends to boost rates several times this year, the U.S. dollar could rally, punishing gold in the process as bullion is dollar-denominated.

Speaking of the U.S. dollar, traffic to our USD ETFs page is up 82% this week, though the PowerShares DB US Dollar Index Bullish Fund (UUP A) is off 1% over the past week. While investors are seeking safe-haven assets, they are eschewing greenbacks in favor of gold and U.S. government debt.

Currency market observers believe the dollar’s rally is fizzling after it proved to be the best-performing developed-market currency in the past two years. That sentiment is weighing on the dollar and UUP.

Further, bond traders are paring expectations that the Fed will be able to proceed with multiple interest rate increases this year. The specter of no Fed rate hikes at all is dollar negative.

Some big-name banks are also turning negative on the U.S. currency. For example, Credit Suisse said Wednesday it sees the euro and the Japanese yen surging against the greenback over the next three months. The European Central Bank and the Bank of Japan are proving to be ineffective at further suppressing their currencies while also missing the mark on efforts to stoke inflation.

UUP, an ETF proxy for the widely followed U.S. Dollar Index, has bled nearly $241 million in assets for the year, according to PowerShares data.

With the yield curve flattening and oil prices continuing to struggle, the financial services sector remains the worst-performing S&P 500 group to start 2016. That has traffic on our Financial Equities page up 81% this week.

The Financial Select Sector SPDR (XLF A), the largest financial services ETF by assets, fell half a percent Wednesday and even more today, bringing its year-to-date loss to about 16%. Bank stocks and ETFs such as XLF are getting pinched on multiple fronts this year.

First, the Fed is seen dithering on interest rates, potentially removing the primary catalyst behind the late-2015 enthusiasm investors displayed for financial services ETFs. When bank stocks soared in the third quarter of 2015 on expectations of higher U.S. interest rates, the sector became overvalued. Second, rising default expectations for smaller oil and gas exploration and production companies are plaguing regional banks that loaned capital to those companies at the height of the U.S. shale boom. Though only 3% of these debts are bank loans, they may cause contagion in the financial system. If those energy companies default on their loans, some well-known banks could be saddled with nonperforming loans on their balance sheets.

Stocks are struggling in early 2016 and traffic to our Inverse Equity ETFs page is up 45% this week as a result. Increased interest in ETFs designed to rise as equities decline jibes with early flows data for 2016. Only three equity ETFs are among the top 10 asset-gathering ETFs to start 2016, while each of the 10 ETFs worst afflicted by outflows are stock funds.

The various funds investors are currently favoring further bolsters the case for inverse equity ETFs. Early in 2016, conservative consumer staples and utilities funds have been favored by ETF investors at the sector level. At the same time, cyclical sector ETFs, such as consumer discretionary and technology funds, have fallen out of favor, indicating that risk appetite is low.

With biotechnology stocks faltering, the health care sector is languishing and falling as well. Treasury yields are pressuring financial services stocks and ETFs. Financial services and health care are the S&P 500’s second- and third-largest sector weights, respectively, after technology.

Fed Chair Janet Yellen told U.S. policymakers Wednesday, “There is always a risk of a recession…and global financial developments could produce a slowing in the economy.”

Those comments did not assuage already jittery investors and perhaps increased the allure of safe-haven assets and inverse equity ETFs.

China’s ever-controversial currency, the yuan, is in the spotlight once again as highlighted by a 30% increase in traffic to ETFdb’s Chinese Yuan ETFs page this week. The WisdomTree Chinese Yuan Strategy ETF (CYB A+) is up by nearly 1% over the past week, a gain that erased the ETF’s year-to-date loss and now has the fund slightly positive on the year.

China’s foreign currency reserves plunged by $99.5 billion in January, the People’s Bank of China (PBoC) reported. China has been running down its vast foreign currency reserves in an attempt to boost the value of its own currency and stem a flow of funds overseas. At $3.23 trillion, China still has the world’s biggest reserve of foreign currency holdings.

The PBoC is in a tough position. On the surface, it appears as though the central bank wants to defend the yuan, but a stronger currency would pressure China’s already slowing, export-driven economy. If the PBoC overtly moves to suppress the yuan to help Chinese exporters, that move would likely stir similar tactics from other Asian exporters such as Indonesia, South Korea and Vietnam.

Over the near term, CYB and other yuan ETFs could lack big moves in either direction because that is exactly what the PBoC is looking to avoid: yuan volatility.

Several different ETF themes are trending this week and as the aforementioned scenarios indicate, risk appetite is low and investors do not appear willing to make significant bets on upside for equities at the moment. As has been the case so many times over the past year, markets are taking cues from the Fed. If higher interest rates prove hard to come by, U.S. dollar and financial services ETFs could come under increased pressure while investors favor fixed-income and gold ETFs.

By analyzing how you, our valued readers, search our property each week, we hope to uncover important trends that will help you understand how the market is behaving so you can fine-tune your investment strategy. At the end of the week, we’ll share these trends, giving you better insight into the relevant market events that will allow you to make more valuable decisions for your portfolio.