As we get ready to start a new year, we asked ETF strategists what ETFs are at the top of their lists for 2016, and why.
Here’s what they had to say:
Scott Kubie, chief strategist of CLS Investments in Omaha, Nebraska, a strategist focused on active asset allocation decision with an eye for global opportunities:
- iShares MSCI Spain (EWP | B-95): Spain’s improved competitiveness will support its fundamentals and the euro’s current stability will keep rates low. As long as policy reforms continue to produce economic growth, Spain looks attractive.
- iShares MSCI Quality Factor (QUAL | A-77): We expect stock market volatility to be higher and the debt markets to be less liquid. High-quality firms tend to exhibit lower-risk characteristics than most companies and produce sufficient free cash flow to fund much of their internal investment.
Stephen Blumenthal, founder and CEO of CMG Capital Management Group in King of Prussia, Pennsylvania, a strategist specializing in using quantitative processes to identify areas of strong relative price leadership:
- O’Shares FTSE Asia Pacific Quality Dividend Hedged (OAPH): A smart-beta ETF focusing on companies that meet certain requirements for market capitalization, liquidity, quality, low volatility and high dividend yield. I believe Asian equities may benefit from ongoing central bank currency wars and QE stimulus, but I anticipate Asian currencies may depreciate against the dollar. The Fed is exiting QE, while the European Central Bank, Japan and China are stepping on their accelerators. OAPH hedges away the currency-related risks.
- Market Vectors Double Short Euro ETN (DRR): Provides aggressive investors with a liquid investment tool that profits when the euro declines versus the dollar. Central bankers will remain on the front pages in 2016. Unimaginably high European debt-to-GDP, high unemployment and a fracturing European Union have led to negative interest rates in Germany and other European countries. Comparatively, U.S. rates are much higher, with the Fed raising rates and moving away from stimulus. Globally, money moves to where it is treated best. This favors a strong U.S. dollar. I expect further decline of the euro versus the U.S. dollar.
- iShares North American Tech-Software (IGV | A-52): Includes exposure to business security, home entertainment (video games) and customer relationship cloud-based software. There are areas that are seeing strong business and consumer demand. Interestingly, global capital flows to the U.S. may provide additional support despite the aged and expensively priced U.S. equity market. One particular area that is seeing strong relative price strength is technology. I favor growth over value in the U.S., and my top sector pick is software and technology. Here too, ETFs offer a targeted way to seek investment return. Top holdings include Microsoft, Adobe Systems and Salesforce.
Michael Venuto, CIO and co-founder of Toroso Investments in New York, a strategist that uses a simple diversified asset allocation approach customized to clients:
- BioShares Biotechnology Clinical Trials (BBC): I really like the venture capital nature of this ETF. They equal-weight biotechnology companies that are in clinical trials. They include a screening process to avoid specialty pharma companies like Valeant. Deal activity volumes in biotechnology remain strong for larger pipeline-starved drug companies acquiring smaller biotech companies. In 2015 in particular, we saw drugs in phase III acquired at record valuations even before receiving FDA approval and generating a dollar of sales, including Synageva acquired for $9 billion, Receptos for $7 billion, Auspex for $3 billion and ZS Pharma for $2 billion, all from the BBC portfolio. With the large pharma companies declining in sales in 2015 and generating anemic growth in 2016, there continues to be strong strategic rationale to acquiring leading biotechnology companies. I don’t believe all of the companies in this ETF will succeed, but the ones that do should provide substantial returns.
Rob Stein, CEO of Astor Investment Management in Chicago, a strategist that builds ETF portfolios based on proprietary macroeconomic models:
- Financial Select SPDR (XLF | A-92): I think the financial sector is strong, and loan demand will pick up as incomes continue to rise with gains in the employment sector. The challenges from loans to the energy sector have bottomed, and with higher rates, profit margins will increase. XLF should outperform the broad markets.
Clayton Fresk, portfolio manager at Stadion Money Management in Watkinsville, Georgia, a strategist focused on delivering returns with less volatility:
- Guggenheim S&P Equal Weight Healthcare (RYH | A-79): Health care was one of the top- performing sectors year-to-date. But it’s been trading sideways over the last few months. With a bit of market strength, it appears the sector could be poised to break higher from the recent range. Plus, I like the equal-weight aspect of this ETF, as it is a bit more diversified away from the large pharma names, as compared with a market-cap-weighted fund. At the same time, RYH has a lower allocation to the sometimes-more-volatile biotech industry.
Wesley Gray, CEO and CIO of Alpha Architect in Broomall, Pennsylvania, a long-term-focused active investor who is also behind a handful of ETFs:
- Concentrated active value was crushed in 2015. This strategy may get worse before it gets better, but for investors with a long time horizon, the odds are tilted in their favor. Investors should check out the following deep value funds—the top five domestic value funds with less than 50 holdings, according to Bloomberg:
- PowerShares Dynamic Large Cap Value (PWV | B-87)
- First Trust Capital Strength (FTCS | B-75)
- WBI Tactical LCV Shares (WBIF | D-33)
- WBI Tactical SMV Shares (WBIB | C-44)
- ValueShares US Quantitative Value (QVAL | C-61)
Contact Cinthia Murphy at [email protected].