Recent economic data on the domestic front bears testimony to
the fact that the U.S. economy is well and truly treading on the
path to recovery.
Retail sales and consumer confidence have been on the rise, more
jobs are being created, there has been an impressive recovery in
the housing market and the growth is finally expected to overtake
the “muddle through” trend. (Read Is This a Bull Market for Retail
ETFs?).
However, despite all these signs of resurgence, it can still be
argued whether these developments (i.e. fundamentals) really
justify the current levels of U.S. equities (sentiments). Of
course, needless to say, any discrepancy between the two can be
attributed to the Federal Reserve and its monetary easing program.
The equation, therefore, is simple; Sentiments –
Fundamentals = The Fed.
Nevertheless, with improving fundamentals, there is no doubt
that the ‘difference’ has been diminishing of late. With that being
said, the investors cannot afford to be complacent yet.
While the broader picture of the market hints at the bullish
trend to continue, the possibility of a ‘healthy’ correction cannot
be ruled out. In the light of the above state of affairs, let us
have a look at some ETF strategies that, in our view have high
chances of outperforming the broader markets in the long term.
Precious Metal Focus: i) A rise in Inflation is long
Overdue ii) A safe haven play
The Federal Reserve’s balance sheet has increased by gigantic
proportions over time, thanks to its monetary easing measures. With
the amount of ‘new money’ created and circulated in the economy,
inflation is bound to increase sometime in future, though that
clearly has not happened as yet.
Nevertheless, the Federal Reserve seems pretty determined to
continue its money printing spree until the threshold of
unemployment level of 6.5% is met, provided inflation stays below
2.5%. Although inflation should have increased with the quantum of
monetary easing in the economy, yet, thus far, it has remained
rather subdued. (See Have We Seen the Bottom in Gold ETFs?)
Also, with a correction for the equity markets well and truly on
the cards, precious metals, particularly gold will be in focus.
With that being said, its white counterpart—silver should not be
ignored either.
The white metal is known to exhibit characteristics of both
precious metals as well as equities. (see Silver--The Equity Like
Precious Metal ETF?) This makes an interesting case for investments
in silver as a rise in inflation will surely pick silver prices up,
thanks to its vast industrial usage.
In fact, the biggest and most popular ETFs from the precious
metal space, the SPDR Gold ETF (GLD) and the
iShares Silver ETF (SLV) are ‘Buy’ rated. GLD has
a Zacks ETF Rank of 2 or ‘Buy’ whereas SLV has a Zacks ETF Rank of
1 or ‘Strong Buy’. Therefore, we expect both these ETFs to do well
in the coming months.
Current Income Focus: Emerging Market Bond ETFs offer a
good play.
It is a very well known fact that the Federal Reserve’s low
interest rate policy has for long plagued investors seeking current
income. Furthermore, investment avenues that were for long
considered to be safe havens like the Treasury Bond ETFs, have
little room for further appreciation.
This is primarily due to the fact that the long-term treasury
yields have very little scope for a further slide. As a result,
from a total return perspective, Treasury Bond ETFs in the form of
current interest income and capital appreciation are rather
limited. (Read Treasury Bond ETFs: Still Room to Run?) At present
emerging market bond ETFs offer better value than the developed
market bonds funds, primarily due to two specific reasons.
Firstly, the currencies of developed economies like the Euro and
the Japanese Yen have been depreciating versus the U.S. dollar due
to their ongoing domestic woes and large scale central bank
monetary easing. Therefore, the currency effect is most likely to
understate returns from the developed market bond ETFs, more than
the emerging market funds.
Secondly, emerging market funds have a higher interest rate
attached to them than most developed market funds. Therefore, from
the current income point of view, the emerging market bond funds
are better placed than their developed market counterparts (Read 3
ETFs Beating the S&P 500).
Further due to the high interest rate scenarios in the emerging
economies the possibility of a rate cuts is far more in the
developing nation than the developed ones. This also makes an
attractive investment case for emerging market bond ETFs.
For the more aggressive investors, local currency denominated
sovereign bond ETFs are suitable options.. In this case, the
WisdomTree Emerging Markets Local Debt ETF (ELD)
is a popular alternative. However, for investors seeking to hedge
the currency effect completely, the U.S. dollar denominated ETF,
iShares J. P. Morgan USD Emerging Markets Bond ETF
(EMB) is a good option that is worth considering.
Low Risk ETFs: Does Not Always Mean Lower
Return
We have mentioned in our previous articles that low risk does
not necessarily mean low return. (See Buy These ETFs for Higher
Returns and Lower Risk). This is especially with regard to the
longer term picture. However, it is very important for investors to
consider the fact that this particular strategy is most likely to
underperform the broader markets in a momentum based rally.
This is primarily because they possess subdued volatility
characteristics like a low beta value or low annualized standard
deviation compared with their ‘higher risk’ counterparts.
However, over the long term, low risk plays prove to be a
winning bet, especially taking into account the investors’ risk
tolerance as measured by their risk adjusted returns. With all that
being said, it is once again imperative to consider the fact that a
broader market correction is long overdue.
In this regard, low risk investing will once again be the focus
of the investors’ attention to ride out the market volatility as
and when the pullback takes place. Two U.S. focused low volatility
ETFs that investors should consider are the PowerShares
S&P 500 Low Volatility ETF (SPLV) and the
iShares MSCI USA Minimum Volatility ETF (USMV).
SPLV has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Low’ risk
outlook.
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WISDMTR-EM LDF (ELD): ETF Research Reports
ISHARS-JPM EM B (EMB): ETF Research Reports
SPDR-GOLD TRUST (GLD): ETF Research Reports
ISHARS-SLVR TR (SLV): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
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