Burns: Junk Rally Unwinding

Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. After another tough day in the market, I'm here with director of ETF research Scott Burns just to survey which ETFs did well, which ones did badly, and what opportunities there could be for investors looking forward. Scott, thanks for talking with me today.

Scott Burns: Jeremy, thanks for having me.

Glaser: So did anything win on a day like today.

Burns: Well, so you know, we look at the world through 11 different ETF/asset class lenses to really look at what a broad, diversified portfolio would look like. We look at those 11 different securities as a kind of market barometer, a little different from what Morningstar has, but more broad. Really, only one thing has actually survived the day, and that would be the short-term Treasury bond market. So we use the iShares Barclays 1-3 Year Treasury Bond with the ticker SHY, and that was positive for the day, and really just barely so. So today was really an ugly day across the whole spectrum of investments.

Glaser: When was the last time we had a day where it seems like everything was doing badly?

Burns: I'd actually have to say probably the biggest surprise of today, and we've got a lot of selling off in emerging markets, European markets, the U.S., but that gold is down. So the SPDR Gold ETF was down around a half percent today. Really, the last time that I can think of where we just had this blood in the streets, everything down, no real place to hide was October of 2008. So I don't know if today is just a one-off day or maybe foreshadowing of something a little more severe.

Glaser: It certainly seems, over the last couple weeks, we've had a lot of these relatively big selloffs. Have you seen that in the year-to-date performance of a lot of the ETF's that you look at?

<TRANSCRIPT>

Burns: It is really hard to find, across this spectrum that we look at of positive performance in the past week, it's about 50/50. So corporate bonds, fixed income in general has actually held up OK during the week. But when we look at the past year, a lot of the gains that were made during 2008-2009 are really being given back. When we look year-to-date total returns at things like the EAFE index, which is the developed world, you know, International ex-U.S. market, we're looking at down nearly 12% for the year. And when we look on a three-year annualized basis, it's down negative 12%.

So, a lot of the positive momentum that was happening, especially outside the U.S., has been stolen away. And inside the U.S., the S&P 500 is almost back to break-even for the year. So, I think I saw something on Morningstar.com today that said we're 10% below the high. So it would seem like a correction is in the making right now.

Glaser: Being that we are 10% below where we were, does that mean that there are now opportunities in U.S. stocks, or is it really a correction back to a reasonable valuation level?

Burns: One thing we have seen is that quality in the U.S. is really holding up. So something that we predicted in the ETFInvestor newsletter at the start of the year was that the junk rally would unwind. And it does appear that the junk rally is unwinding with a little bit of extra pressure coming from Europe. And it's really hard to say, without a little more analysis, as to how much of that European decline is actually a fundamental erosion of the valuation versus a currency, because really, when you're investing internationally, you have to be aware that both parts are going to play in your return. You know, what the base currency is doing as well as the fundamental valuation.

So, it does appear that the lower end of the quality spectrum is really kind of eroding right now. So I think those things move with a lot more momentum, so I'd wait, actually, and be very selective in that area, that I think there was a rising tide that lifted a lot of that so called "junk." But quality seems to be holding up. So, you know, definitely, I wouldn't be looking to sell those assets right now.

Glaser: But for investors looking to put new money into the market, you would say to hold off for now.

Burns: Yeah, definitely. I mean I do think it's OK to be in cash right now. Cash is alpha, actually, at this point in time.

Glaser: Scott, thanks for talking with me today.

Burns: Jeremy, thanks for having me.

Glaser: For Morninstar.com, I'm Jeremy Glaser.