3 Market Surprises Impacting ETFs

Predicting market action is fraught with challenges. Often the market takes unexpected turns, delivering investors with surprising ETF performances. So far this year, there have been a few “surprises” worth noting.

Volatility Is Very, Very Low

So far in 2017, market volatility has been historically low any way you measure it. The CBOE VIX Index is sitting below the 10 mark—a level that’s lower than 99%-plus of all its closing prices since 1990, according to ConvergEx’s Nick Colas. That it’s so low has people wondering whether it could actually go to zero. CBOE’s head Ed Tilly says it cannot, by the way. (CBOE owns ETF.com’s parent company, Bats Global Markets.)

If you measure volatility from the perspective of the S&P 500, we should have already seen at least 19 days of 1%-or-wider moves so far in 2017, based on historical norms, Colas says. But year-to-date, the S&P 500 has only moved 1% or more in just three days.

“It’s not your imagination. U.S. equity markets are much calmer than usual,” Colas said. These are definitely strange days.

From an ETF perspective, there are 19 volatility exchange-traded products on the market today. Most of them are either leveraged or inverse, but the biggest of these strategies is not. The iPath S&P 500 VIX Short-Term Futures ETN (VXX), with $820 million in assets, tracks an index with exposure to futures contracts on the VIX with average one-month maturity, and exposure resets daily.

VXX is down more than 45% year-to-date, bringing its one-year results to a loss of more than 77% in 12 months. Despite the decline, investors have poured $163 million in fresh net assets into this exchange-traded note so far in 2017. 

“The upshot is that actual U.S. equity market volatility should begin to rise (at least modesty) in the coming weeks,” Colas said. “If you buy our construct that volatility follows cycles, then we should be at the trough of one right now. That should cause a pullback in stocks, but it does not portend a subsequent meltdown or melt-up, for that matter.”

10-Year Treasury Yields Are Falling, Not Rising

Following the U.S. presidential election last fall, many market pundits were calling for higher U.S. Treasury yields, and at least through March of this year, that seemed to be the trajectory we were on.

J.P. Morgan, for example, projected 10-year Treasury yields to hit 2.85% by the end of 2017 amid two or three Federal Reserve rate hikes, “less accommodative” bank policy and a deteriorating fiscal balance. That would amount to a 16% increase in yields from levels seen at the end of 2016.

And for a while, that forecast—similar to many others—was spot-on, as 10-year yields rose as high as 2.60% by mid-March. The Federal Reserve’s decision to raise rates and the twists and turns of the new administration were helping push yields higher.

But since then, yields plummeted to a low of 2.18% in April, and are now hovering around 2.40%, at levels lower than at the end of 2016.

In the ETF space, a look at the performance of the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) show just how much the Treasury market has turned course in recent weeks (see chart below). Investors have not bailed on TLT, but have instead poured more than $1.2 billion into the fund so far this year, and nearly $150 million in IEF.

Bitcoin Prices At Record Highs Despite ETF Rejection

Everyone was waiting for the Securities and Exchange Commission to decide whether to approve the market’s first bitcoin ETF, the Winklevoss Bitcoin Trust (COIN). The idea was that a “yes” from regulators would translate into massive bitcoin demand, bringing retail and institutional investors into the bitcoin fold for the first time. Prices would rise.

But the SEC said no, rejecting COIN. Those massive inflows never materialized because the ETF never launched. So bitcoin prices, everyone thought, should drop as a result. And prices did fall initially—but only initially. They have since rallied to a record highs, hitting $1,700, and climbing about 90% year-to-date. That rally has been picking up pace in recent weeks.

ETF investors don’t have a clear vector into bitcoins yet, except for very small allocations in the Web X.0 ETF (ARKW) and the Ark Innovation ETF (ARKK). Each ETF accesses bitcoin through the Bitcoin Investment Trust (GBTC), with an allocation of about 4% each.

GBTC is up 82% so far in 2017, helping drive gains in both these technology funds, which have had a stellar run so far this year. 

Chart courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]