July has been one of the volatile months for the broad equity markets. Though the Dow Jones Industrial Average crossed the 17,000 mark for the first time early in July on the back of accelerating job market and improving economic fundamentals, it has been faltering of late thanks to global economic and political happenings.
Some of the major events that influenced the ETF world in either a positive or negative way are discussed below.
Russia ETFs Swoon by More Sanctions
Russian equity markets have been hit badly again this month thanks to fresh Western sanctions and the downing of the Malaysian passenger jet near the Russian/Ukrainian border that has intensified tensions in the country (read: Russian Sanctions and Malaysian Plane Crash Put These ETFs in Focus).
The terrible trading has also been felt in the ETF world targeting Russia with Market Vectors Russia Small-Cap ETF (RSXJ) plunging the most by double digits. SPDR S&P Russia (RBL), Market Vectors Russia (RSX) and iShares MSCI Russia Capped ETF (ERUS) lost over 8% each this month. These products have a Zacks ETF Rank of 4 or ‘Sell’ rating, suggesting continued underperformance in the coming months.
Investors should note that Russia has been in the limelight since the start of the year following its annexation of Crimea and its deteriorating relationship with the West. In the wake of heightened international sanctions and rising inflation, the Bank of Russia has unexpectedly raised interest rates by 50 bps to 8%. The move represents the third increase in five months.
Indonesia ETFs Shine on Elections
Indonesian stocks have enjoyed a huge rally this month on hopes for a possible Joko Widodo win in the presidential election that has pulled in robust foreign capital into the country. The results on June 22 confirmed his victory and erased the lingering political uncertainty in the country.
While the three funds targeting the nation have resulted in double-digit gains, Market Vectors Indonesia Small-Cap ETF (IDXJ) is a clear winner gaining nearly 15% this month thanks to its true domestic exposure. In fact, the fund is leading the emerging Asia Pacific space higher this year (read: 3 Country ETFs Taking Flight in H2).
All the three Indonesian ETFs have a Zacks ETF Rank of 3 or ‘Hold’ rating.
Portugal ETF Suffered on Banking Woes
The worries over the reliability of one of the big Portugese banks – Banco Espirito Santo – prompted a broader market selloff early in the month. This is especially true as its parent company, Espirito Santo International, missed payments on some of its short-term debt that had raised fears of contagion in other peripheral Euro zone nations (read: Portugal ETF: Canary in the Coal Mine for Europe Investing?).
However, the concern cooled off after the central bank said that the parent company was able to fulfill its capital requirements and would not be affected in any way. As a result, Global X FTSE Portugal 20 ETF (PGAL) targeting the nation has stabilized to a certain extent after a free fall on banking woes. The ETF is down nearly 9.6% this month and has a Zacks ETF Rank of 3.
Agricultural ETFs Hit New Lows
While summer is fuelling rally in the energy prices, agricultural commodities like corn and wheat are on the declining trend thanks to favorable weather conditions that are adding to supply glut. In fact, a number of ETFs in the agricultural world like iPath Pure Beta Agriculture ETN (DIRT), Teucrium Corn ETF (CORN) and Teucrium Wheat Fund (WEAT) touched all-time lows in the month.
The products are down 11.8%, 15% and 9.7%, respectively, this month. CORN and WEAT have a Zacks Rank of 2 or ‘Buy’ rating while DIRT has a Zacks Rank of 5 or ‘Strong Sell’ rating (read: 3 Agricultural Commodity ETFs Slumping in July).
U.S. Small Cap ETFs Slip on Fed’s Valuation Concerns
Small caps have been lagging the broad market rally this year on valuation concerns. The fear deepened this month when the Fed in its monetary policy report had commented that equity valuations of the small cap stocks, in particular social media and biotechnology, are stretched despite the notable downturn in equity prices for such firms early in the year (read: Guide to Small Cap Growth ETFs Investing).
However, the stocks have shown some stability lately. As such, the ultra-popular small cap iShares Russell 2000 ETF (IWM) lost nearly 4% in July compared to a gain of 0.6% for the large cap ETF (SPY) and a loss of 2% for the mid cap ETF (IJH). Many small cap cousins including iShares Russell 2000 Value ETF (IWN), Small Cap Value AlphaDEX Fund (FYT), Russell 2000 ETF (VTWO) and S&P Small-Cap 600 Growth ETF (VIOG) were also off by around 3–4%. VIOG has a Zacks ETF Rank of 2 while others have a Zacks Rank of 3.
Investors should closely watch the developments taking place in these spaces as we head into the next month. Russian ETFs are likely to continue their bearish trend, especially if the U.S. and EU continue to impose tough sanctions on the country. Indonesia and Portugal stocks will see smooth trading on improving fundamentals while agricultural and small cap ETFs could see more pain ahead.
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