After global scare, equity funds rebound

Equity funds finished last month up 4.65%, marking their ninth-best September performance in 50 years and helping push their third-quarter return to 7.32%, a fifth straight quarter of positive performance.

Although widely followed equity market indexes hit multiple closing highs during the quarter, the period wasn’t all smooth sailing. In August, increased tensions in the Middle East and saber rattling by the United States over a reported chemical weapons attack by the Syrian government on its own people pushed commodities prices higher and stocks lower as the world awaited President Barack Obama’s response to the attacks.

Although the Dow Jones Industrial Average and the S&P 500 hit record closing highs early in August, they both posted their worst monthly returns since May 2012. The Dow fell 4.45% for the month, while the S&P 500 lost 3.13% as geopolitical uncertainty and concern over future Federal Reserve Board moves weighed on the investor psyche.

PROPORTIONAL RESPONSE

However, in the early part of last month, after Mr. Obama reiterated that the U.S. response to Syria’s use of chemical weapons would be limited and proportional, with no American boots on the ground, U.S. stocks gradually began to erase the prior weeks’ losses. Investors began focusing more on out-of-favor sectors and stocks, as well as risky assets, pushing small-cap and growth-oriented issues to the top of the pack.

For the first quarter in six, investors generally favored growth-oriented issues, in particular those with heavier exposure to information technology, industrial and health care technology.

At the top of the exchange-traded-fund leader board was the $229.9 million Guggenheim Invest Solar ETF (TAN), with a return of 45.04% and average trading volume of 218,941 shares per day for the quarter. In second place was the $19.5 million Market Vectors Solar Energy ETF (KWT), which tagged 36.42% onto its second-quarter ending value.

Both funds are in Lipper’s Global Natural Resources Funds classification.

Despite concerns over the Middle East and the impact that the Fed’s “tapering” might have on emerging markets, the World Equity Funds macro classification — up 8.46% for the quarter — shot to the top of the leader board. The $283.8 million PowerShares Golden Dragon China Port (PGJ), up 36.39%; Global X Social Media Index ETF (SOCL), up 31.33%; and Market Vectors Egypt Index ETF (EGPT), up 29.89%, were at the top of the equity universe.

SAGGING GLOBAL GROWTH

Although the India stock market rose slightly last month, on a quarterly basis, it was still mired in its continuing saga of sagging growth and falling currency, which was only exacerbated by reports of China’s slowing economy. Market pressures in this region pushed three India and three Indonesia — both are major trading partners of China’s — ETFs to the bottom of the list for the quarter: Market Vectors Indonesia Small-Cap ETF (IDXJ) and iShares MSCI Indonesia ETF (EIDO) declined 29.28% and 24.73%, respectively, and ended in the cellar of the category.

With the S&P 500 hitting major milestones during the quarter, it wasn’t surprising to see the SPDR S&P 500 ETF Trust (SPY) attracting some $6.3 billion in new assets, taking in the largest net inflows during the quarter for the ETF universe.

As a result of a report indicating that China’s purchasing-managers index had jumped to a six-month high, accompanied by news of India’s recent financial reform, investors injected the next-largest amount of net new money into the iShares MSCI Emerging Markets ETF (EEM), up $4.7 billion. And despite some price improvement for gold during the quarter and a positive return for the period — up 11.17% — the SPDR Gold Shares (GLD) handed back some $2.6 billion and suffered the largest net redemptions for the quarter.

Tom Roseen is head of research services for Lipper Inc.