The U.S. stock market is going nowhere fast this year. China is rattling global markets with surprising currency and market interventions. Japan’s three-arrow plan is plodding along. And the Fed could be about to announce its first rate hike in six years.
These are just some of the themes commanding ETF strategists’ attention as they make allocation decisions for investors. We talked to three of them, and asked them what ETF they bought in 2015 that they didn’t already own, and why.
Here’s what they had to say:
Larry Whistler, president and chief investment officer of Nottingham Advisors; Amherst, New York:
We added the WisdomTree Japan Hedged SmallCap Equity ETF (DXJS | C-56) in 2015. We decided to double-down on our trade from last year, where we went long the Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP | B-75), and felt the small-cap space would be a high-beta way to play our bullishness on Japan.
It’s worked out well for us thus far. We remain convinced that Prime Minister Abe will continue to push for shareholder-friendly reforms, and the current valuation of Japanese equities seems reasonable to us. We feel most of the devaluation of the yen has taken place, but we could conceivably see 140 Y/$ over the next year or so; thus, we remain currency-hedged.
Wesley Gray, executive manager at Alpha Architect; Broomall, Pennsylvania:
In 2014, we investigated the costs and benefits of owning 10-year Treasury bonds versus lower-duration bonds. Our conclusion was that you don't own Treasury bonds for the yield; you own them for their flight-to-quality diversification benefits.
The next step was determining how we'd get the exposure. It boiled down to Vanguard's Intermediate-Term Bond Index Mutual Fund (VBIIX) at 0.12 percent [for its expense ratio], and the iShares 7-10 Year Treasury Bond ETF (IEF | A-51), at 0.15 percent. VBIIX was a bit cheaper, but after considering the ETF’s preferential tax treatment on the capital gains component of the bond returns, we decided on IEF.
Rob Stein, CEO of Astor Investment Management; Chicago:
One of note is the ProShares UltraShort 20+ Year Treasury ETF (TBT) , which is an inverse fund. We bought that not too long ago. We think it’s an important one—not because we necessarily have a view that long-term rates are going to go much higher—but more because we wanted to get the duration closer to zero in our portfolio.
Short-term rates are going to go up, but not long-term rates, so we purchased TBT and we do aggressive rebalancing with it in our active income portfolio. It does a great job at managing duration, while allowing us to still pick up yield on some of the other holdings.
We also added the First Trust Energy AlphaDex (FXN | B-53). A lot of people are looking to get into the energy market now after it had a big pullback, but our economic fundamentals told us to get out of energy and materials last year, so we missed the carnage.
Now that our models are seeing signs of bottoming in that sector, we’re getting involved. It’s not a momentum, or a timing trade, it’s fundamental analysis, which got us out last year, and is now telling us there’s opportunity.
But both TBT and FXN are very small positions, less than 5 percent.
Charts courtesy of StockCharts.com
Contact Cinthia Murphy at [email protected].