As 2018 nears, it’s a good time to re-evaluate portfolio holdings, and consider where best to allocate assets.
We asked some ETF strategists for their favorite ETF picks going into 2018. Here’s where they see opportunity:
Gary Stringer, president/chief investment officer, Stringer Asset Management
Going into 2018, we’re emphasizing areas that have lagged in 2017: U.S. small- and midcaps, as well as value. Global economic growth is stronger than expected, and we think that trend will continue, so we’re focusing are areas that have lagged but may soon lead. With the fee compression within the ETF space, we can access these areas on the cheap.
Ben Lavine, chief investment officer, 3D Asset Management
- iShares Edge MSCI Intl Value Factor ETF (IVLU)
- iShares MSCI Emerging Markets ETF (EEM)
- iShares MSCI Emerging Markets Small Cap ETF (EEMS)
- First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS)
Cyclically sensitive assets such as global value (e.g., industrials and financials) and commodities have both lagged global growth and “higher quality” assets over the last five to seven years. If we’re in the late stages of an expansionary cycle, we would expect higher inflation to be priced into financial assets, such as a steepening in global yield curves where long rates rise faster than short rates.
From a broad asset allocation viewpoint, investors may want to consider adding to global ex-U.S. value, whether through developed markets or more broadly through emerging markets, and especially small-cap emerging markets through either plain-vanilla or smart-beta ETFs.
Deborah Frame, president/chief investment officer, Frame Global Asset Management
We are currently positioned for growth for the first quarter of 2018, but cautious of a reversion back to stagnation in the later part of 2018. The caution is dominated by themes of U.S. protectionism and geopolitics that will have possible impact on U.S. growth.
While we expect three more rate hikes in 2018, economies outside of the U.S. continue to be more accommodative, and that will drive foreign capital to the U.S. The results of tax reform will take some time to filter through to the economy. Only then will we see if it has led to economic growth and higher tax revenues being generated.
One area we like is the Asia-Pacific region, where the outlook remains robust and recent data point to a pickup in momentum. Macroeconomic policies should continue to support growth.
Clayton Fresk, portfolio manager, Stadion Money Management
One of the biggest ETF picks for 2018 is still shrouded in mystery. With the pending reclassification of sectors and industries in 2018, the resulting effect on ETFs could prove very interesting.
Technology, consumer discretionary and the new communication services sector could all see a decent overhaul, particularly as it pertains to the FANG [Facebook, Apple, Netflix, Google] stocks. But since the final constituency of the new sector has not been finalized, the mystery remains.
The new communication services sector is intriguing. But until the industry sees how this change shakes out and what the resulting ETF exposure looks like, it’s difficult to pinpoint how exactly this play will turn out.
Tyler Mordy, president/chief investment officer, Forstrong Global
This has been a long economic cycle, particularly for the U.S. At 8 1/2 years, it ranks third out of 33 cycles recorded since 1854. History shows that post-crisis periods, like the one since 2009, tend to be protracted affairs. This episode has been no different. Many economic engines, like those in the eurozone, are just starting to rumble.
These earlier-cycle countries are becoming the beneficiaries of the next phase of outperformance (moving away from America). Europe and Emerging Asia are the most likely candidates—regions with cheap currencies that are showing signs of earnings and economic acceleration and trade on much more favorable valuations.
In Europe, with encouraging economic momentum materializing and the risk of a eurozone breakup receding, the financial sector should be buoyed by improving consumer and business confidence, translating into a pickup in credit growth.
In China, investors naturally worry whether equity prices can keep rising even as the economy keeps slowing, but this is the wrong question. The most important facts about China today are the shift from exports and capital spending to consumer-led growth, improving margins and financial liberalization. Now’s the time to be investing in an unloved sector.
David Haviland, managing partner /portfolio manager, Beaumont Capital Management
- iShares U.S. Aerospace and defense (ITA)
- First Trust Dow Jones Internet index fund (FDN)
- O’Shares FTSE U.S. Quality Dividend ETF (OUSA)
- iShares MSCI Emerging Markets ETF (EEM)
- iShares MSCI All Country World Index ex U.S. (ACWX)
We have a positive outlook on three domestic equity ETFs. The first is ITA, thanks to its large, industrial-based constituents. It has both civilian and military products and services.
The second, FDN, owns companies that generate at least half of their annual sales and revenue from the internet. It’s fairly safe to say the internet is not going away, and that its use and proliferation is only going to increase over time.
Finally, OUSA’s process of selecting the highest-dividend-yielding equities is very similar to what our firm has been doing since 1981. The O’Shares selection process focuses on high-quality, lower-volatility and highly profitable companies.
On the international side, we still have positive outlooks for EEM and ACWX. U.S. equities have been outperforming their international brethren for years, but in 2017, equity leadership was overseas, which is a turnaround that we believe should last for years.
Contact Cinthia Murphy at [email protected]