Each year, I pick a handful of ETFs to watch (and potentially invest in). It’s one of my favorite blogs I write each year. For one shining moment, I get to play the active manager, making long-shot bets on obscure corners of the market or highlighting ETFs that bring new ideas to the table.
Last year, I called out three funds:
- Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF | B-71)
- Market Vectors Africa ETF (AFK | D-21)
- iShares National AMT-Free Muni Bond ETF (MUB | B-79)
How did I do? Well, let’s just say I should stick with my day job.
Some Hot, Others Not
In a year when the S&P 500 rose 13.46 percent, an equal-weighted blend of my three picks was down 0.26 percent on the year. Ouch.
A couple of my picks did OK.
I chose DBEF because of concern that the euro would fall. “A 10 percent move in the dollar will translate into roughly a 10 percent gain for DBEF versus EFA,” I wrote on Jan. 2, 2014.
And sure enough, DBEF closed the year up 3.46 percent while EFA dropped 6.20 percent, nearly a 10 percent difference. Clearly, I’m a genius … except for the fact that betting on Europe at all was a bad idea last year versus betting on the U.S.
MUB did great, posting a 9.35 percent total return. Kudos to me.
But AFK got slaughtered, losing 13.61 percent for the year. Falling prices for oil producers hurt, but the real issue was a collapse in Nigeria. The third-largest country in AFK—Nigeria’s market—fell 32 percent on concerns that the country will devalue its currency.
It just goes to show that picking obscure corners of the market exposes you to real risks.
Picks For 2015
Despite the challenges I faced in 2014, I’m sticking my neck out again in 2015 and highlighting a handful of ETFs that are worthy of consideration. I don’t know how these will perform, but I think each represents a unique opportunity in the market.
I’m calling out DBEF for the second year running because I think it’s a critical tool for investors. While Europe and the rest of the MSCI EAFE Index performed poorly last year, DBEF did its job, shielding investors from the downside in the euro and the yen.
As a reminder, DBEF, with $1.9 billion in assets, tracks the exact same index as the $52.0 billion iShares MSCI EAFE ETF (EFA | A-92); the only difference is it hedges out the impact of the euro. Last year, that difference meant that DBEF outperformed by nearly 10 percent.
With the euro and the yen still on the ropes, I think much of the $52 billion invested in EFA should warrant DBEF as an alternative.
IUSB is one of my favorite new ETFs. The fund, launched in June 2014, provides a subtle but important twist on traditional core bond exposure.
The most popular bond ETFs in the world all track the Barclays Aggregate Bond Index. These include the iShares Core U.S. Aggregate Bond (AGG | A-98), the Vanguard Total Bond Market (BND | A-94) and the SPDR Barclays Aggregate Bond (LAG | A-98), which together have $51.2 billion in assets under management.
There’s nothing massively wrong with the Barclays Aggregate, which captures the majority of the U.S. bond market, but it does omit a few things that most rational investors would want. Specifically, it ignores high-yield bonds, as well as sovereign debt from other countries issued in U.S. dollars.
IUSB tracks a “total bond” index that includes both of these things. The result is a fund that pays almost the same yield as funds like AGG, but does so with much shorter duration: IUSB’s weighted average maturity is slightly more than 5 1/2 years versus seven years for AGG. With interest rates potentially on the rise in 2015, shortening up on duration while maintaining your yield sounds like a good thing.
IUSB is very low cost, charging just 0.15 percent in annual fees.
Is this better core bond exposure for most investors? I think there’s a case to be made for that.
ETF No. 3: United States Oil Fund (USO | A-70)
Oil is a disaster. With crude prices down from $110 to under $50 a barrel, you’d have to be crazy to buy a fund like the USO.
Which is exactly why I love the fact that $1.5 billion has flowed into the fund in the last six months, while the price of oil has fallen. ETF investors are crazy!
Or maybe not. Catching a falling knife is generally a bad idea, but if I were picking a fund that might be up 20 percent or 30 percent in the next year, USO would be it. I have no idea if oil will go to $30 or bounce back to $75 or higher, but as a punt, it’s interesting.
EMQQ is a new fund that provides exposure to roughly 40 companies, mostly Chinese Internet stocks like Baidu, Alibaba and Tencent. There are two reasons to like this fund:
- First, you could like it because it’s sexy. This is a fund of red-hot companies that, while richly valued, are growing fast. If you want some volatility in your portfolio, it could be a good pick.
- More importantly, this fund fills in a crack in the global index methodology. Many of these companies operate in China but trade in New York, and are therefore excluded from the MSCI China Index. Adding in some EMQQ exposure can fill out your overall exposure to the fast-growing China market.
Will it go up, down and sideways? Yes: The fund will be enormously volatile. But this is an interesting corner of the market that most of the indexing world misses.
ETF No. 5: SPDR DoubleLine Total Return Tactical ETF (Not Launched Yet)
It’s a little bit odd to anoint an ETF that hasn’t even launched yet, but here goes: I think one of the most important new funds of 2015 will be the SPDR DoubleLine Total Return Tactical ETF.
The fund will be managed by DoubleLine CEO and CIO Jeff Gundlach, the most widely followed investor of our day. He’s built a company from scratch into a $55 billion juggernaut in a few short years, and has delivered solid performance. His Core Fixed Income mutual fund has outperformed the Barclays Aggregate by an annualized 2 percent over the past three years.
What’s exciting about this launch is that it brings the best of active management to the ETF space. As the fixed-income market gets a little more … interesting … in 2015, the new DoubleLine ETF will be an interesting option for investors.
At the time this article was written, the author held a position in DBEF. Contact Matt Hougan at [email protected].