Dollar-Weighted Category Performance

    On the week's dollar-weighted performance, only 2 of 26 categories ended the week black - short funds and China funds, returning a respective 2.87% and 1%.  Another 3 categories ended the week only marginally red, falling at most 0.36% percent - currency funds, Japan funds, and broad Asia funds.

    The remaining 21 categories were down at least 1% (call/write) and, at worst, nearly 7% (infrastructure).  Of these categories, the average return was nearly 3% down.

    With the week at last done, there still does not seem to be a single non-psychological motivator for the broad market losses.  Both gold and oil ended the week down, but stock and bond market returns do not seem to match what we would expect in such a week. 

    One possibility I offer as a suggestion is that foreign investors, having enjoyed the past two months, view the current dollar strength as a local maximum.  The US Dollar Index, having dropped throughout the market rally, is believed by most to continue to decline in the medium-term.  Given this, then regardless of their investment type, the current dollar high would provide them the best return after conversion to their home currency, thus explaining an otherwise unexplainable lack of historical correlation between asset classes.

Dollar-Weighted Category Return

    Wednesday saw continued outflows with 24 of 26 categories trading down, bringing 14 of 26 categories to red for the past week.  The worst percentage losers for the day were Latin America, emerging markets, and Europe, all trading down over 2%.  Dollar-weighted European ETF returns are now nearly break-even for the past month.  Note as well the incredible 97% correlation between the Latin American ETF returns and the S&P 500 over the last week.  I would avoid Latin American ETFs as alternatives to US markets right now if you're looking for diversification.

    Those categories that were significantly less negative than the rest of the market are convertibles, call/write, commodities and resources, and Japan, as had been seen in Tuesday's market summary.  Given the possibility of a market down-turn, I would most favor the writer funds, as selling calls is pure profit in falling markets.

    The only two categories up were currency ETFs, just by a hair, and short ETFs.  This week's US data, combined with the ECB tick and strong Australian data, has accelerated the dollar depreciation trend.  As the dollar loses strength, watch for increased downside risk in transports, utilities, and Asian funds.

Dollar-Weighted Category Return

    21 of 26 categories ended Tuesday down, with the average category trading down -0.40% with an average dollar flow out of 3 million.  The worst outflow was in small caps with 33 million red, followed by real estate, utilities, and large caps.  The only two categories that saw non-negligible dollar inflows were short funds and China, despite the volatilitly that Chinese markets have experienced this week. 

    It's interesting to note which categories have had the lowest correlations to the SPY in the last week.  Those with negative correlations are convertible funds, China funds, and currency funds.  Low but positive categories include Japan funds, commodities and resources funds, call-write funds, and broad Asia funds.  Asian markets have remained strong despite high volatility and dramatic swings, ignoring changes in the bond and currency markets that could point to troubling costs and inflation in the coming cycle.

NB: The original market cap values were very wrong, thanks to order of magnitude errors in E*Trade's data.  Thanks to Steven Towns for the corrections.

    Though the number of competing ETFs in the market has been increasing dramatically, broadly profitable market conditions have kept adverse conditions from weeding many out.  Though the crude contango complaints that have surfaced in the past few months may represent a thread that will be common in the coming years, most sectors do not seem to currently face this level of criticism.

    In analyzing CEF and ETF options for investment in Asia, Japan, and China, there are a number of trends I spot.

1. Japan funds have on average more than twice the market cap of either China or Asia funds.
2. Asia funds have on average more than twice the dividend yield of either China or Japan funds.
3. China funds have the highest average expense ratios, while Asia funds have the lowest.

    All in all, I have a relatively hard time rationalizing specific country exposure when the broad Asia funds seem to have a number of advantages in management costs and obvious increase in geographic diversification.

    The full tables I used are below.

    Last Monday, I had commented on how the Japan Smaller Capitalization Fund was noticeably oversold relative to its ETF counterpart, the WisdomTree Small Cap Japan DFJ.  In the past three days, JOF has slowly been gaining ground back on DFJ, and so far in early trading, is up over twice DFJ for the day.

    If we assume that JOF will return to near equal on the month with DFJ, look for "fair value" to return around $12.

Dollar-Weighted ETF/CEF Category Return

Dollar-Weighted ETF/CEF Category Return

    The Japan Smaller Capitalization Fund is a CEF trading on the NYSE with the ticker JOF.  JOF is down nearly 11% in the past month and 18% YTD, compared to the Wisdom Tree SmallCap Japan Fund DFJ, which is down 4% on the month and only 1% YTD.  The following graph illustrates the divergence of the two funds over the past month:

    As you can tell, unless JOF has an extreme weight in an asset that DFJ lacks that has also been horribly hit, it seems that JOF must be trading at a discount.  More so, as the volume chart for JOF indicates, it seems that the divergence is solely due to the closed nature of JOF combined with a large sale.  I would keep my eye on this fund if Japan can find stable footing this week.