Global Equity ETFs Feel Recession Woes

Investor confidence on what the future holds is quickly disappearing.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Global equity ETFs are feeling the weight of investors’ lack of confidence in the global economy. With every passing day, it seems more and more investors are buying into the notion that the world is headed to recession—the U.S. included.

In a market commentary on Friday, Nick Colas, chief market strategist at Convergex, said: “Fixed income investors are giving up on global growth, and that includes the U.S., even though fundamentals here are still better than Japan or Europe. We might be the best house in a bad area, but the whole neighborhood is on fire.”

Colas is not alone. Other market pundits such as Morgan Creek Capital’s Mark Yusko have recently talked of the growing possibility of recession.

Curve Spread Flat

One telltale sign of how investors feel about the outlook for economic expansion is the spread between two- and 10-year Treasurys. That metric, which is a “sign of confidence in future economic growth,” is currently at its lowest reading—of 1.05—since 2007, according to Colas. It’s even narrower than it was when the U.S. was at the depths of the financial crisis, he says.

Behind that number is the downward pressure stemming from Japanese and European yields, which, in some cases, went negative recently. But a lot of it is also merely a reflection of market sentiment about growth prospects—clearly, confidence is lacking.

Global ETFs In Retreat

The recent performance of the $5 billion iShares MSCI ACWI Index Fund (ACWI | A-97) and the $5 billion Vanguard Total Stock Market (VT | A-99) are good examples of the ongoing global rout. The funds have now each declined roughly 11% year-to-date, as the chart below shows, and are now back to levels not seen since late 2013:

Chart courtesy of

If you look at the portfolios of both funds, you will see that some of the weakest-performing equity markets are also some of their biggest weightings.

The U.S. represents about 53% of both ACWI and VT. Japan, which has seen its stock market decline more than 17% year-to-date, comes in second, with an 8% allocation. China is also among the five biggest country exposures—and Chinese stocks have now declined upward of 20% in 2016.

Financials A Market Millstone

There isn’t much help from a sector perspective, either. The largest sector allocation in both ACWI and VT is financials about 21% of each portfolio. Financials is the worst-performing economic sector in the U.S.—it’s even underperforming energy, despite the weakness in oil—because of concerns about what negative interest rates will cause going forward.

There are market bulls out there, such as The Wharton School’s finance professor Jeremy Siegel and Schwab’s Liz Ann Sonders, who argue a recession is unlikely. But the prevailing trend seems to be pointing in the other direction. The market no longer expects the U.S. Federal Reserve to raise rates again this year.

And according to Colas, the three indicators that we have hit a market bottom have yet to be seen:

  1. The S&P 500 has to drop 5% or more in a single day.
  2. The CBOE VIX Index has to top 40.
  3. Correlations for all equities near 1 after several days of a sell-off. We are not quite there yet.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.