Although advisors and investors have focused intently on the Federal Reserve’s plans for interest rates this year, fixed income exchange traded funds have swelled in size and popularity. In fact, bond ETFs listed around the world now have more than $500 billion in combined assets under management.
Plenty of market participants and pundits have an opinion regarding when the Federal Reserve will raise interest rates. Fortunately, there is some uniformity to those prognostications with “later this year” being the most often bandied about time frame for Fed “lift-off.”
Conventional wisdom dictates that as markets anticipate higher interest rates from the Fed, the U.S. dollar rises.
The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has obliged,Dollar strength combined with the anticipation of divergent monetary policies throughout the developed world has been a boon for currency hedged ETFs.
The WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) are top two asset-gathering ETFs this year with combined inflows of over $27.5 billion.
Those inflows could be signaling professional investors’ belief that Fed liftoff is a done deal and is coming soon. Or perhaps that isn’t the case and easy money policies in the ex-U.S. developed world are driving the dollar higher and dollars into currency hedged ETFs. [Big Growth for This Currency Hedged ETF]
“What jumps out about this year’s fund flows activity for equity ETFs is that nondomestic equity ETFs have dominated equity ETFs. Nondomestic equity ETFs have grown their coffers by almost $64 billion so far for 2015, while domestic equity ETFs have seen over $8 billion leave. If this trend holds through year-end, 2015 will be the first year since 2010 that nondomestic equity funds have had more net inflows than domestic ones. Nondomestic barely nudged out domestic for most net inflows for 2010 (+$34.0 billion versus +$33.7 billion), while the roughly $70-billion spread for this year would be by far the highest annual difference between the two groups for the 20 years Lipper has been tracking the data,” according to Lipper data.
As Lipper notes, both the SPDR S&P 500 ETF (NYSEArca: SPY) and the iShares Core S&P 500 ETF (NYSEArca: IVV) have lost assets this year, a trend that perhaps underscores investors’ preference for developed market ex-U.S. equity funds in 2015.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF
Tom Lydon’s clients own shares of SPY.