Trump win catches ETF investors out as risk assets climb

Nov 29th, 2016 | By | Category: Alternatives / Multi-Asset

By Nick Leung, Research Analyst at WisdomTree


Nick Leung, Research Analyst at WisdomTree.

Donald Trump’s surprise victory in the US Presidential election caught many ETF investors out, as risk assets surprised to the upside and safe havens routed in the aftermath.

WisdomTree’s Boost range of short and leveraged exchange traded notes has revealed that investors trying to protect themselves against an expected post-Trump sell-off actually missed out on further gains in US equities, which now sit at fresh record highs following upward moves of 3.0%.

Conversely, safe havens tumbled despite expectations that a Trump win would spark uncertainty and a flight to safety. Gold in particular has faced heavy selling pressure, falling by 5% to $1,209/oz since the election on 8 November.

The consensus prior to the result was that a win for Trump would be bearish for risk assets and bullish for safe havens, but this has not materialised and many investors have been left wrong-footed.

Trading data for Boost ETPs in the five days after the US Presidential election reveals outflows of some $32m from long S&P 500 positions, with a further $5m invested in shorts. At the same time, turnover for Boost’s S&P 500 ETP also spiked, up almost 2.5x month-to date in November compared to the previous month.

In precious metals, Boost ETPs saw four times as much trading activity into long gold positions versus shorts in the five days after the result, despite the sell-off.

However, there is one area where investors have been spot on and that is in US treasuries, where yields have jumped violently as traders speculate on Trump’s victory leading to wider budget deficits, more government spending and rising inflation.

Yields on the 10Y have climbed nearly 50 bps to 2.3% so far, and investors have been playing this tactically via Boost’s products, favouring short positions across various leverage factors.

Global sovereign bond yields climbed violently as US inflationary expectations were revised upwards on the back of an expected increase in fiscal stimulus. I believe the ensuing bond sell-off may prompt investors to consider hedging their exposure now if they expect this trend to continue.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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