ETF Expert

One thing… and one thing only… has kept me optimistic on stock ETFs. Bernanke has no intention of raising rates anytime soon.

The ramifications for equity investors are clear-cut. With negligible interest rates in the States, worldwide investors have little fear that the U.S. dollar is going to strengthen. It follows that borrowing the U.S. dollar for “nada” and investing in higher-yielding or higher appreciating assets makes perfect sense in the intermediate-term. Stocks will keep rising.

Why “fight the Fed?” If they’re not going to change course anytime soon, should you? Why fight the trendlines? Virtually all stock ETFs and commodity ETFs are above 50-day and 200 day moving averages.

In recent weeks, the mainstream media have finally started identifying the real reason for stock market gains. Earnings? Productivity? Healthy recovery? Nah… it’s the ”dollar carry trade” (a.k.a. “risk trade”).

The mini-correction in late October/early November demonstrated that as the dollar gets stronger, stock and commodity investors become a bit more squeamish. And yet, the squeamishness doesn’t last long because a strong dollar is simply not in the cards until the Fed changes direction.

For all of the stock market gains, however, there are 3 good reasons to question the dollar carry trade’s longevity. One, investors may be moving cash off the sidelines, but a great deal of that money has gone into large U.S. corporate bonds. Tom Lydon of ETF Trends noted that corporate bond asset inflows — both investment grade and junk — have been breaking records. You have to wonder, if the “risk trade” equated to incredible risk tolerance, why would bonds see record-breaking inflows?

Second, if investors were endlessly enamored by the potential of exceptional equity gains, would they really be pulling money out of small-cap stocks? The premier small-cap proxy, the iShares Russell 2000 Index Fund (IWM), recognized more than $1 billion in outflows for the moth of October; what’s more, IWM has severely underperformed its large-cap big brother over the last 6 weeks, the iShares Russell 1000 (IWB).

Last, but hardly least, the major large-cap benchmarks for U.S., Europe and the emerging markets continue to set “higher lows” and “higher highs.” Chart-followers may love to see this activity. Yet the same activity has NOT been happening for financial stocks or small-caps.

Summing up, not only has risk-taking become a bit more selective, but bond market interest isn’t indicative of unabashed risk-taking. Perhaps this is a maturing bull market… or perhaps investors are spreading out their risk across different assets. Nevertheless, a waning interest in financials and small-company stocks bears watching.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

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