Dollar Rally Boosts Small Caps, Routs Gold, Foreign Stocks
The ETF 50 Index™, the industry's leading measure of ETF performance, slipped 1.4% in August, dragged down by foreign equities and a rout in gold as the U.S. dollar rallied sharply.
SPDR S&P 500 Trust (SPY), the largest exchange-traded fund with assets of $80.20 billion, eked out a gain of 1.5% in the month. It was only the fourth time in the last 12 months the benchmark of large-capitalization U.S. stocks outperformed the ETF 50 Index™, but it was also the second in a row.
The emerging story this summer is the relative strength of the domestic economy versus the rest of the world, which has sent the U.S. dollar sharply higher. That's bad for foreign stocks and gold bugs, and very, very good for the most economically sensitive domestic stocks, the small-cap value group.
Domestic small caps asserted strong leadership in the month, with iShares Russell 2000 Index (IWM) spurting 3.6%. iShares Russell 2000 Value Index (IWN) surged 5.2%, substantially more than iShares Russell 2000 Growth Index (IWO), which gained 3.2%.
Small companies get a greater percentage of revenue and earnings from domestic operations than multinationals. Beaten-down value stocks are most sensitive to the business cycle.
Meanwhile the second- and third-largest ETFs, iShares MSCI EAFE Index (EFA) and iShares MSCI Emerging Markets Index (EEM), sank 4.2% and 6.3%, respectively, in August.
SPDR Gold Shares (GLD), a traditional dollar hedge, tumbled 9.3%. iShares Silver Trust (SLV) collapsed 23.7%.
PowerShares DB US Dollar Bullish (UUP), which with assets of $500 million is not among the 50 largest ETFs, spurted 5.3% in August.
The ETF 50 Index™ has crumbled 10.6% in the last three months, 11.0% so far in 2008 and 12.6% in the last 12 months.
The ETF 50 Index™ represents the price-only asset-weighted performance of the 50 largest exchange-traded funds. The index consists of a broadly diversified universe of funds representing domestic and foreign stocks, bonds and commodities, and is a better indicator of actual investor returns than indices tied to particular markets.
