Small-Cap and Emerging Market ETFs

As with many markets throughout history, when it looks as dire as it can possibly look and the last “holder” throws in the towel amid heavy put buying and a sea of red across sectors, we often see a steep and sudden reversal. Such is what occurred last Friday in U.S. equities as mentioned above given the “hammer candle” technicals we noticed across the NDX and the SPX on Friday’s close.

For most of last week, IWM put activity was enormous, and it is no secret that small cap stocks have lagged their large cap counterparts throughout 2012 (IWM +5.09% YTD versus S&P 500 +8.65%). Put buyers have also been present in higher beta segments of the market including Emerging Markets recently, via EEM (iShares MSCI Emerging Markets) puts, although it is important for us to mention that this particular ETF is actually in “net inflows” mode, reeling in more than $1 billion recently while competing ETF VWO (Vanguard Emerging Markets continues) to lose assets week after week as of late.

We believe that this transition is twofold, 1) it is tied to Vanguard’s early October announcement that they were abandoning their relationship with MSCI Indices and moving onto new relationships with both FTSE and CRSP, causing institutional managers whom are benchmarked to MSCI to make some very important swap/transition choices and 2) we could be seeing tax related “swap” activity between the two funds. Also on the higher beta side, investors have largely discarded Corporate Bonds as of late, including both High Yield (HYG) and Investment Grade (LQD), and QQQ lost more than $270 million in net redemption activity last week as well. On the flipside, net buying occurred in what would appear as “risk off” segments of the markets, with bond funds such as BND and BIL reeling in considerable assets as well as “steady” sectors that have gotten beaten up as of late, Healthcare (via XLV creations) as well as Utilities (via XLU creations).

XLU call buyers appeared last Thursday in size as well, as the sector ETF has fallen steeply since the U.S. Presidential elections, down more than 7.7% in the trailing one month period, as they also in GDX (Market Vectors Gold Miners). Thus, it is no surprise to see the sizable creation activity in terms of asset inflows in both of these battered ETFs, so perhaps a bounce of some sort in these specific sectors, as well as the equity markets is in store in the near term. We do remind folks that this week of course is an abbreviated one, with Thanksgiving on Thursday and a half session this coming Friday, and we imagine that many investors will be very watchful, in this post-election environment, of the “Black Friday” results that are forthcoming, as it would be hard to argue that market “mover and shaker” Apple (AAPL), is not somehow tied to “Retail” these days.

Top Asset OUTFLOWS (Redemptions) Notables:

#1 SPY (SPDR S&P 500) $-3.7 billion  #2 IWM (iShares Russell 2000) -$805 million  #3 VWO (Vanguard Emerging Markets) $-750 million #4 HYG (iShares High Yield Corporate Bond) $-548 million #5 LQD (iShares Investment Grade Corporate Bond) $-329 million (flows based on IndexUniverse.com data)

Fridays have been, for what feels like since October, “ugly”, “painful”, or whatever other negative sounding adjective you would like to insert here. This past Friday, despite another rough beginning, actually ended on a positive note for a pleasant change. We point out that the NDX (Nasdaq 100) actually fell through several levels of technical support during the session, but reversed momentously to close not only up on the day, but substantially higher (+0.39% and above the 2534 level, during the day it traded as low as 2494 and below that key 2500 level).