The headlines have focused on the year-to-date gains for the S&P 500 as well as the relatively minor losses for the Dow Jones Industrials. Simply stated, most investors are more comfortable hearing about the performance of popular benchmarks than the tribulations of the Russell 2000 or Japan’s Nikkei or the S&P Europe 350.

On the flip side, when small company stocks in the Russell 2000 are haplessly flapping their wings, there is a reasonable possibility that the wealth destruction may spill over into the largest company names in the Dow and S&P 500. The same can be said for a significant drawdown in large-cap European stocks in the S&P Europe 350 or small-caps in an index of smaller corporations in the euro-zone. Rare is the year when a high correlation between stocks of all stripes is absent.

It is worth noting that many of the strongest year-over-year gainers have had the roughest month-over-month setbacks. Small European corporations and small U.S. stocks had been some of the premier performers before July knocked a wind out of their respective sails. In contrast, many of the more beleaguered stock ETFs across a one-year span have found themselves in the enviable position of serving up positive month-over-month results. Emerging markets had been left for dead by many who grew tired of the limited risk-reward prospects. Today, inexpensive valuations as well as hope for economic resurgence have bolstered Asia and Latin America.

A Significant Shift In Stock ETF Leadership?
1 Year % 1 Mo %
Guggenheim Solar Energy (TAN) 42.1% -4.1%
iShares PHLX SOX Semiconductor (SOXX) 28.9% -5.1%
SPDR Pharmaceuticals (XPH) 26.4% -6.0%
WisdomTree Europe Small Cap Dividend (DFE) 21.2% -7.6%
Revenue Shares Small Cap (RWJ) 14.3% -4.2%
SPDR S&P 500 (SPY) 15.8% -1.8%
iShares MSCI Latin America (ILF) 12.3% 2.5%
Market Vectors GoldMiners (GDX) 11.7% 0.6%
Market Vectors Coal (KOL) 10.8% 2.4%
iShares MSCI Thailand (THD) 9.3% 1.4%
iShares MSCI Singapore (EWS) 7.5% 1.6%

Unfortunately, stock leadership may not be the only issue at hand. Stocks across the board may have difficulty if safety-seeking investment dollars continue finding their way into longer-term U.S. Treasuries as well as highly regarded sovereign debt. The 10-year bond yield on the German bund at 1.10% now rests at an all-time record low. Indeed, it is difficult to imagine buying every dip as if we were still in 2013. After all, debt instruments, gold and safe haven currencies are all showing resilience here in 2014.

TLT 200

Granted, there are a number of things with the potential to spook stock investors. Russia-Ukraine dampens enthusiasm for European equities and has the potential to drag on U.S. equities. Similarly, exorbitant valuations in the small-cap arena can eventually bog down “overvalued” larger-caps that have ignored questionable fundamentals for years due to easy monetary policy. The ultra-accommodative Federal Reserve, however, is slowly removing air from the lend-n-spend tire.

From my vantage point, investors need to heed the bond market’s admonition. In the 6-month period between 8/7/13 and 2/6/2014, the S&P 500 SPDR Trust (SPY) and long-dated Treasuries via iShares 20+ Treasury (TLT) had a strong negative relationship. Its rolling 6-month correlation resided close to -0.70%. Stocks up, bonds down… and vice versa.

SPY Versus TLT

Now take a look at the 6-month period 2/7/2014 through 8/6/2014. Both SPY and TLT have nearly appreciated in lock-step. Positive relationships between these assets do not typically last as long as they already have, implying that something has to give. The S&P 500 SPDR Trust (SPY) could succumb to the pressures associated with normal stock market corrections. Conversely, iShares 20+ Treasury (TLT) might fall victim to rocketing long-maturity yields and simultaneous price depreciation. The least likely outcome would be SPY and TLT continuing to move in the same direction as one another.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationship.

Related Articles
  1. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  2. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  3. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  4. Investing Basics

    6 Investing Mistakes That the Ultra Wealthy Don't Make

    Understand what ultra-high-net-worth individuals are and how they invest. Learn about the six key investment mistakes that the ultra wealthy avoid.
  5. Mutual Funds & ETFs

    Top 5 Emerging Market ETFs

    Find out which emerging markets ETFs have enough of an asset base, trading volume and low fees to be considered top choices in the segment.
  6. Mutual Funds & ETFs

    How to Profit From Market Volatility Using ETFs

    Volatility funds offer exposure to high greed and fear levels while avoiding predictions on price direction.
  7. Mutual Funds & ETFs

    The Best Currency ETFs

    We look at the best currency ETFs for gaining exposure to various global currencies, based on daily volume and performance.
  8. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  9. Mutual Funds & ETFs

    Top 3 German Bonds ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and private bonds issued by Germany with different duration yields.
  10. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  1. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  6. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  2. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  3. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  4. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  5. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!