You may have been thinking about getting into ETFs this year, but before you race to the phone in your jammies to become the next Warren Buffett, you need to consider something.
Remember, this is not like you’re at your fridge deciding whether to heat up the turkey leftovers or have them cold with the rest of last night’s beer, this is your hard-earned dollars we’re talking about, so you want to make sure you’ve done some due diligence.
ETFs performed well last year and, at the end of 2014, had total assets in approximately 1,600 U.S. traded funds of over $2.0 trillion, but that doesn’t mean they will continue merrily along in 2015. As the markets heave and roll, You need to take a look at the economic forecasts to find those funds still riding in the sweet spot.
So what funds should you be considering?
In general, the American economy seems to be on the mend but many analysts are warning of increased market volatility due to outside pressures originating in the still struggling Eurozone and the hammered Russian economy which is looking forward to halving its GDP forecast in 2015. And even though the US economy is seeing brighter days, it still isn’t a rose garden as a whopping 12.6% of Americans remain underemployed, and with wages at levels less than they were before the Great Recession (can we just call it a Depression already?) and no expected increases in those wages, it doesn’t look like it’s going to get better any time soon. What does this mean for the investor?
Well, investors have been living in optimistic oblivion and taking to the market like a fat kid on cake as the S&P 500 has risen 200%, the NYSE gained 165%, the NASDAQ jumped over 260% and the Dow Jones Industrial Average soared over 165% since 2009, when everything bottomed out.
Companies riding this bullish wave will feel the need to continue reporting increased profits, but because consumer spending drives approximately 70% of the GDP in the US, these companies are going to have to financially engineer their profits with cost-cutting, normal course issuer bids and increasing dividends. There is no telling when the piper will need to be paid for these actions, but eventually these companies are going to have to file real sustainable revenue growth. So where does this mess leave you when it comes to ETFs?
Considering the aforementioned conditions, you may want to consider high quality ETFs - that is, funds that provide targeted exposure to high quality stocks. This category is the next step in the evolution of rules-based strategy ETFs which blurred the lines between traditional passive funds (tracked broad equity benchmarks) and active funds (which attempted to beat these benchmarks).
One such ETF is the iShares MSCI USA Quality Factor (
NYSE: QUAL,
Stock Forum). This ETF covers large and midcap US Stocks with high return on equity, stable earnings growth and low financial leverage. These characteristics combined with the fact that the fund is American-based will allow the investor to endure international economic unrest and local market instability.
iShares Russell 1000 ETF (
NYSE: IWB,
Stock Forum) paints another pretty investment picture as it gives exposure to large U.S. companies like Apple (AAPL), Exxon Mobil (XOM) and Microsoft (MSFT); it provides access to 1000 domestic stocks within the find and is geared toward long-term growth. Again, this remains within the relatively safe economic boundaries of the United States, however, if the Eurozone manages to pull a rabbit out of its financial hat, some experts point to the Deutsche X-trackers MSCI EAFE Hedged Equity Fund (
NYSE: DBEF,
Stock Forum) as a likely contender.
The US dollar continues to perform will on the global market with it almost reaching parity with the euro. With the devolving international political and economic situations, the American dollar may be a good bet for investment with PowerShares DB U.S. Dollar Index Bullish (
NYSE: UUP,
Stock Forum). This fund tracks the greenback relative to a basket of six major world currencies – the euro, the Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is fund is still considered speculative, so maybe you want to make sure you’re not betting the farm on this one.
Interestingly enough, despite the current picture of employment, some analysts remain optimistic and recommend investment in the SPDR S&P Retail (
NYSE: XRT,
Stock Forum) and PowerShares S&P SmallCap Consumer Discretionary (
NASDAQ: PSCD,
Stock Forum). I don’t know if I would be quite so quick to throw my money behind these ones.
There are some dissidents to the theory of American equity domination on the world market, citing that countries such as Germany and Japan have far more accommodative central banks than the US, so it may be in your best interests to consider hedging your currency risk.
If Japan is your flava, the iShares Japan Fundamental Index ETF fits the bill (
TSX:T.CJP,
Stock Forum). In China, the iShares China Index ETF (
TSX:T.XCH,
Stock Forum) covers the spectrum, while the iShares India Index (
TSX:T.XID,
Stock Forum) has been a nice little earner.
So there you have it, a small gathering of ETFs expected to make headway in 2015, so commence some more due diligence and make an informed investment that will not only help you through 2015, but set the stage for long-term growth of your portfolio – you deserve it.