As 2017 nears, it’s a good time to re-evaluate portfolio holdings, and consider where best to allocate assets.
We asked some top ETF strategists for their favorite ETF picks going into 2017. Here’s where three of them see opportunity:
Ben Doty, senior investment director, Koss Olinger; Gainesville, Florida
Going into 2017, we are investing in value strategies across all market capitalizations. While we can’t call when the cycle of value beating growth will take place, we know that value has been an underdog for many years now. The value premium exists over the long term—decades—but it is cyclical; some say toward the twilight of a bull market.
- Guggenheim S&P 500 Pure Value ETF (RPV) is one of our favorites in this space.
While many factors, such as low volatility, may be overpriced, we believe that fundamentals put pure value multiples more in line with historical averages as of the third quarter of 2016. In our study of five historical periods (since 2005), when the 10-year U.S. Treasury rose, the S&P 500 Pure Value Index outperformed the S&P 500 approximately 64% more on a cumulative basis.
The principal risk we see in pure value is the possibility of high downside capture in the event of a correction or an all-out bear market. The initial sting appears to be greater, however, until investors realize the prices of these value stocks are built with a margin of safety.
Investors should also be comfortable with the implied sector concentration of the strategy as it is now. The top three sectors are financials, utilities and consumer discretionary.
Disclosure: At the time of writing, Koss Olinger held a position in RPV.
Ben Lavine, chief investment officer, 3D Asset Management; Hartford, Connecticut
Investors may want to position for a flat, but volatile, market for 2017. The world will be adjusting to a new fiscal and monetary regime reflecting higher cyclical growth, but with it, prospects of higher inflation.
In this environment, there are two ETFs to consider:
Midstream pipeline distributors benefit from stable oil/gas prices and rising demand, and distributors have been able to realize more value out of their pipeline assets when they were spun off into master limited partnerships (MLPs).
MLPs have some tax advantages, and have attracted yield-hungry investors. But the MLP structure was under a lot of stress during sharp commodity price collapses when historical correlations to oil prices suddenly spiked. That happened as recently as the first quarter of 2016.
For that reason, rather than investing in MLP ETFs, investors may want to consider investing in the general partnerships (GPs) instead. MLPX is a passive, rules-driven ETF that primarily invests in midstream GPs while limiting its MLP investments to 25% of the fund—that’s a tax advantage.
GPs also offer more growth potential, rather than income, since they hold incentivized distribution rights that entitle the GP to a higher proportion of quarterly distributions. This helps the fund to be less sensitive to a rise in interest rates versus pure MLP funds. The midstream model should perform well in a flat, stable commodity-price environment.
Disclosure: At the time of writing, 3D Asset Management held a position in MLPX.
If 2017 ends up as a flat but volatile market, investors may want to consider low-volatility, absolute-return strategies. Unfortunately, there are not many cost-effective options to choose from.
With an 0.85% expense ratio, JPHF offers an attractive core option around which to build a retail alternatives-based strategy. J.P. Morgan employs a rules-based approach to build a diversified absolute-return portfolio targeting 4-6% absolute return, while keeping the stock market beta to approximately 0.3. (The fund is only two months old, so AUM is still very small, as is the live track record.)
JPHF focuses on three quantitatively driven themes: equity long/short; event-driven, such as merger arbitrage and share repurchases; and global macro, such as carry and momentum trades. This ETF maintains flexibility when it comes to allocating among the three strategies depending on expected returns.
Tyler Mordy, president/chief investment officer, Forstrong Global; Toronto
Here are two ETFs that can be used in the context of a balanced portfolio going into 2017:
Investors looking for an equity encore in a post-Rajan Indian world will not be disappointed. Fundamentally, India has a lot going for it—relatively less reliance on global growth, orthodox monetary policy, etc.
But a new catalyst may have emerged: With former head of central bank Raghuram Rajan smashing inflation, and the significant decline in the oil price surely helping his mandate, there is big potential for Indian policy rates to come down. Investors may well be treated to a triple merit scenario of falling interest rates, rising currencies and rising asset prices. Assets right across India may benefit, but the equity market is poised for a big rerating.
The world’s central bank chariot wheels have not just hit the ground, they have gone through it, and are burrowing deep into the monetary unknown. More than a quarter of the world’s population now lives in countries with negative interest rates. Yet paradoxically, optimism on bonds is at an almost record high, given the above backdrop.
We have been longer-running proponents of a “lower for longer” interest rate outlook. Yet there are limits to linear thinking. U.S. long-term 30-year rates fell from 3.2% to 2.4% in the last year. That’s a 25% decline. Couple this epic bond rally with our forecasts of fiscal expansion and the Fed mulling rate hikes, and bond caution is now in order.
Investors should now consider shortening duration and taking on floating-rate exposures like BKLN where possible. U.S. senior leveraged loans offer an attractive alternative to high-yield bonds. Within a company's capital structure, they are typically senior to the claims of other creditors. The loans pay a floating interest rate at a predetermined spread over a reference rate (usually Libor), once a “floor” in the reference rate is eclipsed. BKLN mitigates duration risk while still providing an attractive yield.
Charts courtesy of StockCharts.com
Disclosure: At the time of writing, Forstrong held positions in INDA and BKLN.
If you are a strategist or an advisor, and you would like to share your top ETF pick for 2017, please contact Cinthia Murphy at [email protected].