ETF Database February 18 Trends: Oil, Gold and China Are in the Spotlight

With the yen rising as investors look for safe-haven assets, and speculation that the Bank of Japan is unlikely to unveil additional monetary stimulus plans in the near-term, Japanese stocks and ETFs have been under pressure. That explains why traffic to our Japan ETFs page has nearly doubled since last week.

For the week ending February 17, the CurrencyShares Japanese Yen Trust ETF (FXY B) is higher by nearly 1%, buoyed by investors’ thirst for safe assets. Even with the yen’s recent strength, some Japan ETFs have managed to cobble together modest gains. For example, the WisdomTree Japan Hedged Equity ETF (DXJ B-) is higher over the previous five trading sessions, a surprise given that ETF’s positive correlation to the weaker yen.

The slowdown in China is weighing on Japan’s economy, Asia’s second-largest behind China. During Thursday’s Asian session, data showed that Japan’s trade balance returned to a deficit last month thanks in large part to an 18% year-over-year drop in the value of shipments to China. Shipments to the U.S., another major trading partner of Japan’s, slipped 5.3% last month, YoY.

Last month, the Bank of Japan shifted to negative interest rates, a move that could be a sign the central bank is running out of tools with which to stoke inflation and suppress the yen.

As highlighted by the yen’s recent strength, investors remain fond of safe-haven assets and that has been a boon for gold. With the yellow metal in style once again, traffic to our Gold ETFs page is higher by 42% since last week.

Even so, that figure is actually a decrease in growth percentage from the previous week, when traffic to that page more than doubled. While investors’ enthusiasm for updates on gold ETFs may not be dwindling, enthusiasm for the ETFs themselves could be retreating.

Over the past week, the SPDR Gold Shares ETF (GLD A-), the world’s largest ETF backed by physical holdings of bullion, is up by 1.8%. Although GLD and rival gold ETFs notched gains Wednesday, gold funds retreated during the previous two sessions as stocks surged, prompting investors to revisit riskier assets. A full-fledged return to equities would likely imperil gold ETFs, such as GLD, because much of this year’s bullishness surrounding the yellow metal is the result of its reputation as a shelter-from-the-storm investment.

What could bode well for gold in the near- to medium-term, though, is that the Federal Reserve could be hamstrung when it comes to raising interest rates before the end of the first quarter, as well as dollar weakness. The greenback has largely been passed over as a safe-haven destination since early this year, indicating that the dollar bull market is either vulnerable or at least taking a break.

Emerging-market equities and the relevant ETFs remain under pressure this year and China is no exception to that trend. It takes more than just one week to erase a lengthy bear market such as the one many emerging-market ETFs are currently mired in. But for the week ending February 17, the iShares China Large-Cap ETF (FXI A) is up 5.13%.

Suddenly-resurgent Chinese stocks are helping drive traffic to our China ETFs page, to which views climbed 31% over the past week. Over that period, FXI, the largest China ETF trading in the U.S., outpaced the MSCI Emerging Markets Index by nearly 200 basis points. That could prove to be an encouraging sign as FXI has lagged the widely followed emerging-markets benchmark by about 780 basis points this year.

Chinese stocks are trading at their highest levels in three weeks, but data indicate short sellers are targeting stocks trading in Hong Kong, including some of FXI’s holdings. If bearish bets on Chinese stocks prove accurate, the iShares MSCI Hong Kong ETF (EWH B+) could come under increased pressure. Real estate stocks, the largest industry weight in the Hong Kong ETF, are favorite targets of short sellers.

Oil is the most heavily traded commodity in the world and, arguably, the most controversial. So it is not surprising that traffic to our Oil ETFs page is up 26% since last week.

The United States Oil Fund (USO B), which tracks front-month West Texas Intermediate futures, is up 8.6% for the week ended February 17. Traders have bid oil futures higher, helping send USO higher. Oil’s ascent has been aided by talk that Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries (OPEC), is finally prepared to cut production to boost prices.

It is widely expected that Russia, the largest non-OPEC producer, along with OPEC members Iran and Iraq, will follow Saudi Arabia’s lead and pare output.

Buoyed by gold, traffic to our Precious Metals ETFs page is up 23% since last week. Although gold is seen as one of the quintessential safe-haven investments, other precious metals, such as silver, are seen as riskier assets.

The iShares Silver Trust ETF (SLV B-), the largest silver ETF, is up 0.8% over the past week. Silver prices are intimately tied to gold, explaining why SLV is up 10.2% year-to-date. That is welcome relief for investors who have seen SLV lose more than 50% during the five years ending February 17, more than triple GLD’s losses over the same period.

ETFs backed by physical holdings of palladium and platinum decreased over the past week, indicating precious metals investors are sticking with gold and silver funds. Additionally, risk appetite probably has not yet returned to levels at which market participants feel comfortable embracing palladium and platinum funds over gold ETFs. The former group is more volatile than the latter.

The past several trading sessions have restored some luster to riskier assets, but it will take more than just a few days to confirm whether or not investors’ “risk on” mood has been fully restored.

Year-to-date, six of the top 10 ETFs in terms of new assets are U.S. government bond funds and another is GLD. If that trend reverses in favor of higher-beta sector ETFs, such as consumer discretionary and technology, or emerging-market funds, it could confirm the return of risk appetite.

Traders and investors should look for follow-through from ETFs such as FXI and USO to measure how much risk has been restored.

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.