Top Macro ETFs From Alpha Think Tank

ETF.com’s Alpha Think Tank experts pinpoint three prospective countries.

Working extensively on ETF.com’s Alpha Think Tank publication, I feel privileged to hear firsthand geopolitical and investment insights from some of the most renowned strategists in the world.

Our new weekly publication has depth, consisting of macroeconomists like Nouriel Roubini, along with geopolitical strategists like Ian Bremmer and George Friedman. Our all-star roster also includes chief investment strategists, technical strategists, currency experts, national best-selling authors and even indexing gurus. (For a full list of strategists, check out our Alpha Think Tank home page.)

The diverse insights we get from so many different corners of the investment world provides us with invaluable investment views. We then take these insights and use our market-leading analytics to select the best ETFs to target these themes.

We’ve now covered almost two rounds of strategist interviews since our publication started in early February. I heard many investment themes through the course of six months, but several were mentioned more than others.

Here are three of the most-talked-about macro themes I’ve heard thus far, along with the ETFs selected by our Analytics team, to capture those themes.

SPAIN iShares MSCI Capped Spain (EWP | B-94)

Spain has been front and center for many of our strategists since our think tank first convened in early 2014, starting with Don Luskin, the chief investment officer at the research and investment consultancy Trend Macrolytics. In late January, he was very bullish on Spain, calling it the “Tennessee of Europe.” Luskin reiterated his call in early May that peripheral Europe’s equity rally was still in its early innings.

In March, Roubini sang a similar tune for the eurozone, which he said could surprise on the upside, as risks from a eurozone breakup subsided. He singled out Spain as the best of peripheral Europe. Only a few weeks ago, Roubini told us he expects outright bond purchases by the European Central Bank by the end of this year, which would continue to feed the ongoing eurozone equity rally.

From a technical perspective, Spain (EWP) continued to be Tom Dorsey’s No. 3 overall pick, based on his indicators, when we last interviewed him in late June.

For cap-weighted Spanish equities, it doesn’t get any better than EWP. For 53 basis points a year, the fund holds 22 large- and midcap Spanish companies. The fund’s marketlike coverage means financials, mainly Banco Santander, dominate its weighting. With $2.5 billion in assets and trading more than $25 million at a daily spread about a penny wide, EWP caters to both large and small investors. Also, the fund’s portfolio yields roughly 3.5 percent.

JAPAN db X-trackers MSCI Japan Hedged Equity (DBJP | B-70)

Japanese equities rallied sharply in 2013, but Jim Rogers reminded us in February that the Nikkei 225 Index is still 60-70 percent below its all-time highs set more than 20 years ago. He thinks Abenomics will eventually ruin Japan, but in the meantime, he believes the massive amounts of money being printed will likely find its way into the stock market.

Stratfor’s George Friedman told us in March he’s optimistic about Japan, pointing to the country’s internally held debt and its ability to maintain full employment in spite of the “lost decade.” He sees Japan as a country moving forward in the coming five to 10 years.

Meanwhile Roubini, in a June interview, pointed to some green shoots in Abe’s “third arrow” of structural reforms, including plans to reduce corporate taxes and reform Japan’s government pension investment fund. After a slow start in 2014, he thinks Japan is poised to rally in the second half of the year.

Regarding the yen, Roubini expects additional quantitative easing from the Bank of Japan sometime next year. Axel Merk, the well-known currency investor, also thinks further stimulus from the Bank of Japan is inevitable. In the long run, he expects further depreciation in the yen due to the BoJ’s current monetary policies.

For a currency-hedged Japanese equity play, DBJP provides the most marketlike coverage of Japanese equities. For 45 basis points a year, the cap-weighted fund captures roughly 240 large- and midcap Japanese companies, all while neutralizing exposure to the dollar-yen currency cross. Despite a slow start, DBJP is now fairly large, with $436 million in assets under management. Liquidity has picked up— it trades roughly $2 million a day at 4-cent spreads.

CHINA SPDR S&P China (GXC | C-41)

China is often key in every macroeconomic discussion, since global growth is now so interconnected to the world’s second-largest economy.

In early March, Jim Rogers pointed to an unloved Chinese equity market that’s down significantly from its all-time highs. He said the government is committed to spending lots of money in specific segments of their economy, and told us he’s starting to invest again in certain “offshore” Chinese securities.

In April, Marc Faber, author of the “Gloom, Boom and Doom Report,” also pointed to China’s depressed markets, while highlighting the country’s questionable accounting standards and its massive credit bubble. Faber told us he owns Hong Kong shares, which he prefers to own for a China turnaround.

Meanwhile, both Brendan Fitzsimmons—head strategist at Medley Global Advisors, and Ed Yardeni, head of Yardeni Research, favor Chinese consumer companies.

In February, Fitzsimmons said he expects China’s economy to continue humming along, rather than implode or surge to the upside. A few months later in June, Fitzsimmons alluded to China’s demographics favoring wages and employment, a positive dynamic for consumers.

In March, Yardeni said the Chinese economic slowdown was directly impacted by the government’s commitment to transform the economy from an export- to a consumer-led growth model. While he sees hiccups along the way, over the long haul, he expects China to be successful in its historic transition.

For comprehensive “offshore” Chinese securities, which both Rogers and Faber prefer, GXC is the clear winner. For 59 basis points, the fund captures roughly 280 large-cap, midcaps and small-cap “investable” Chinese securities traded in both Hong Kong and the U.S. The seven-year-old fund has more than $840 million in assets and trades more than $3.5 million a day at 0.05 percent spreads.

Roughly 90 percent of GXC is weighted in Hong Kong-listed Chinese securities (Faber’s preference). Finally, GXC holds many nongovernment-owned consumer-related companies listed in both Hong Kong and the U.S., and includes many U.S.-listed e-commerce Internet firms.

Charts courtesy of StockCharts.com

So, there are our Alpha Think Tank’s top 3 macro-themed ETFs. I want to stress that these are but three of the many themes discussed weekly with our strategists. Many more macro views are constantly discussed, from U.S. equities, emerging markets, fixed income, commodities and currencies.

It goes without saying that market conditions and geopolitical events can unfold rapidly at times, causing strategists to either re-evaluate or change their investment views.

That’s also why we interview our strategists on a quarterly basis and revisit previous calls to verify if any views have changed. I’ve always thought knowing which markets to avoid, or keeping track of investments in case of game-changing market events, are equally important.

Coming Next Week: 3 Contrarian ETFs From Alpha Think Tank

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.