Recent economic data on the domestic front bears testimony to
the fact that the U.S. economy is well and truly treading on the
path to recovery.
Retail sales and consumer confidence have been on the rise,
more jobs are being created, there has been an impressive
recovery in the housing market and the growth is finally expected
to overtake the "muddle through" trend. (Read
Is This a Bull Market for Retail ETFs?
However, despite all these signs of resurgence, it can still
be argued whether these developments (i.e. fundamentals) really
justify the current levels of U.S. equities (sentiments). Of
course, needless to say, any discrepancy between the two can be
attributed to the Federal Reserve and its monetary easing
program. The equation, therefore, is simple;
Sentiments - Fundamentals = The Fed
Nevertheless, with improving fundamentals, there is no doubt
that the 'difference' has been diminishing of late. With that
being said, the investors cannot afford to be complacent yet.
While the broader picture of the market hints at the bullish
trend to continue, the possibility of a 'healthy' correction
cannot be ruled out. In the light of the above state of affairs,
let us have a look at some ETF strategies that, in our view have
high chances of outperforming the broader markets in the long
Precious Metal Focus: i) A rise in Inflation is long
Overdue ii) A safe haven play
The Federal Reserve's balance sheet has increased by gigantic
proportions over time, thanks to its monetary easing measures.
With the amount of 'new money' created and circulated in the
economy, inflation is bound to increase sometime in future,
though that clearly has not happened as yet.
Nevertheless, the Federal Reserve seems pretty determined to
continue its money printing spree until the threshold of
unemployment level of 6.5% is met, provided inflation stays below
2.5%. Although inflation should have increased with the quantum
of monetary easing in the economy, yet, thus far, it has remained
rather subdued. (See
Have We Seen the Bottom in Gold ETFs?
Also, with a correction for the equity markets well and truly
on the cards, precious metals, particularly gold will be in
focus. With that being said, its white counterpart-silver should
not be ignored either.
The white metal is known to exhibit characteristics of both
precious metals as well as equities. (see
Silver--The Equity Like Precious Metal ETF?
) This makes an interesting case for investments in silver as a
rise in inflation will surely pick silver prices up, thanks to
its vast industrial usage.
In fact, the biggest and most popular
from the precious metal space, the
SPDR Gold ETF (
iShares Silver ETF (
are 'Buy' rated. GLD has a Zacks ETF Rank of 2 or 'Buy' whereas
SLV has a Zacks ETF Rank of 1 or 'Strong Buy'. Therefore, we
expect both these ETFs to do well in the coming months.
Current Income Focus: Emerging Market Bond ETFs offer a
It is a very well known fact that the Federal Reserve's low
interest rate policy has for long plagued investors seeking
current income. Furthermore, investment avenues that were for
long considered to be safe havens like the Treasury Bond ETFs,
have little room for further appreciation.
This is primarily due to the fact that the long-term treasury
yields have very little scope for a further slide. As a result,
from a total return perspective, Treasury Bond ETFs in the form
of current interest income and capital appreciation are rather
Treasury Bond ETFs: Still Room to Run?
) At present emerging market bond ETFs offer better value than
the developed market bonds funds, primarily due to two specific
Firstly, the currencies of developed economies like the Euro
and the Japanese Yen have been depreciating versus the U.S.
dollar due to their ongoing domestic woes and large scale central
bank monetary easing. Therefore, the currency effect is most
likely to understate returns from the developed market bond ETFs,
more than the emerging market funds.
Secondly, emerging market funds have a higher interest rate
attached to them than most developed market funds. Therefore,
from the current income point of view, the emerging market bond
funds are better placed than their developed market counterparts
3 ETFs Beating the S&P 500
Further due to the high interest rate scenarios in the
emerging economies the possibility of a rate cuts is far more in
the developing nation than the developed ones. This also makes an
attractive investment case for emerging market bond ETFs.
For the more aggressive investors, local currency denominated
sovereign bond ETFs are suitable options.. In this case, the
WisdomTree Emerging Markets Local Debt ETF (
is a popular alternative. However, for investors seeking to hedge
the currency effect completely, the U.S. dollar denominated ETF,
iShares J. P. Morgan USD Emerging Markets Bond ETF (
is a good option that is worth considering.
Low Risk ETFs: Does Not Always Mean Lower Return
We have mentioned in our previous articles that low risk does
not necessarily mean low return. (See
Buy These ETFs for Higher Returns and Lower
). This is especially with regard to the longer term picture.
However, it is very important for investors to consider the fact
that this particular strategy is most likely to underperform the
broader markets in a momentum based rally.
This is primarily because they possess subdued volatility
characteristics like a low beta value or low annualized standard
deviation compared with their 'higher risk' counterparts.
However, over the long term, low risk plays prove to be a
winning bet, especially taking into account the investors' risk
tolerance as measured by their risk adjusted returns. With all
that being said, it is once again imperative to consider the fact
that a broader market correction is long overdue.
In this regard, low risk investing will once again be the
focus of the investors' attention to ride out the market
volatility as and when the pullback takes place. Two U.S. focused
low volatility ETFs that investors should consider are the
PowerShares S&P 500 Low Volatility ETF (
iShares MSCI USA Minimum Volatility ETF (
. SPLV has a Zacks ETF Rank of 1 or 'Strong Buy' with a 'Low'
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WISDMTR-EM LDF (ELD): ETF Research Reports
ISHARS-JPM EM B (EMB): ETF Research Reports
SPDR-GOLD TRUST (GLD): ETF Research Reports
ISHARS-SLVR TR (SLV): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
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