Despite a number of uncertainties hovering over the market, US
stocks have managed to deliver a positive return so far in the
month--that is historically the worst month of the year for
With clear signs of the economy picking up momentum, the 'taper'
now largely priced-in by the market and reduced chances of a
military action in Syria, the outlook for stocks now appears to
be brightening but debt ceiling debate and budget negations still
remain potential threats.
As we approach the last quarter of this year, it may be a good
time to look at your portfolio and realign it according to the
changing investment landscape. (Read:
3 Ultra-cheap ETFs for Value Investors
Time to Overweight Cyclical Sector ETFs
Many investors fear that rising rates will kill the stock market
rally, but the fact is that the increase in rates reflects an
improving economy and lower risk of deflation-which are positive
for stocks. While economy is certainly not going to start growing
at breakneck speed anytime in near future, the overall economic
picture continues to brighten slowly.
Increase in interest rates are bad for stocks only when the
central bank raises them to combat inflation, which is not going
to be the case anytime in the near future. (Read:
Senior Loan ETFs-The Best Bet for Rising
There are some sectors that will benefit more in the improving
economic environment and this may be right time for investors to
start repositioning their portfolio with higher allocation to
some of the cyclical sectors like technology, industrials and
energy that have a better earnings growth outlook for 2014,
compared to the current year.
Technology sector has remained out of favor with investors due to
several industry-specific issues and less-than supportive global
macroeconomic environment. At current valuations, the sector
looks attractive. Industrials also look poised to benefit from
the strong revival in global manufacturing activity. (Read:
Auto ETF in Focus as Car Sales Rebound
Some of the top ranked ETFs from these sectors like iShares
Industrials ETF (
) and Vanguard Information Technology ETF (
) are worth considering.
Dividend Growth ETFs may outperform High Dividend
Dividend stocks and ETFs have experienced some headwinds in the
face of taper talk, but investors need to remember that dividends
have accounted for more than 40% of the total returns from the
market over a long time horizon and thus they should be a part of
any long-term investment portfolio.
Further dividend payments are expected to continue to increase in
the coming months as most large US companies have huge cash piles
on their balance sheet and are in a position to increase payouts
However, in my view, ETFs that hold stocks with a high dividend
growth potential have much better outlook compared with ETFs that
focus on high dividend yielding stocks. Most high-yield ETFs
focus on sectors that are likely to underperform in the rising
My top pick remains Vanguard Dividend Appreciation ETF (VIG)-a
Zacks Rank #1 (Strong Buy) ETF. It holds large high quality
companies that have a record of increasing dividends for at least
Current top holdings include Proctor& Gamble, PepsiCo,
Wal-Mart and Chevron. With its current strong focus on cyclical
sectors like consumer goods/services industrials and energy, this
ETF is poised to do well if the economy in general and labor
markets in particular continue to improve.
With an expense ratio of 0.10%, this is one of the cheapest funds
in this space. The dividend yield at 2.2% is not remarkable, but
this fund is better suited for investors who seek long-term
capital appreciation along with income and not just high current
Prepare for the Rise in Interest Rates
In anticipation of tapering, interest rates have moved up
significantly, the 10-year Treasury note yield touched 3%
recently-the highest since July 2011 and a sharp move from 1.6%
seen earlier this year. While interest rates have come down
slightly since then, the trend of rising rates still remains
Going by the performance of Barclays U.S. Aggregate Index, bond
market is on track to deliver its worst performance in the
37-year history of the index. Thus, you should get rid of all
longer duration products in your portfolio, as they will be hurt
the most in a rising interest rate environment.
Should investors still have some allocation to bonds? It depends
on investors' risk and return preferences and the investment
horizon. Bonds do reduce portfolio volatility and provide
Investors could consider switching to ultra short duration
products or products that provide protection against interest
rate rise. Floating Rate ETFs like iShares Floating Rate Note
) and Senior Loan ETFs like PowerShares Senior Loan
) could be interesting options now.
These funds have returned 0.5% and 2.4% respectively this year
while most bond ETFs have suffered losses.
Look for Gems among the Emerging Market Ruins
Emerging markets ETFs have seen steep declines this year mainly
due to rising worries about the end of the era of cheap money.
However, not emerging countries are in the same situation. In
some cases, the current sell-off appears to be overdone and some
of these markets offer excellent long-term investment
opportunities at current valuations.
Emerging markets that depend on external capital flows to finance
their wide current account deficits are most vulnerable to QE
'tapering'. Further current crisis has also brought to the fore
the structural problems that were already existing in some of
these countries. (Read:
Russia ETFs-Immune to Emerging Market
Countries like India, Indonesia, Brazil, Turkey and South Africa
are most likely to continue to suffer in the coming years. On the
other hand countries like Mexico, South Korea and Poland that
have sound macroeconomic fundamentals and lower dependence on hot
money are likely to emerge as long-term winners. Consider
investing in iShares Mexico ETF (EWW) or iShares South Korea ETF
(EWY). Apart from fundamentals, economic pick-up in the US will
also benefit both these funds.
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PWRSH-SNR LN PR (BKLN): ETF Research Reports
ISHARS-MEXICO (EWW): ETF Research Reports
ISHARS-S KOREA (EWY): ETF Research Reports
ISHARS-FL RT BD (FLOT): ETF Research Reports
ISHARS-US INDU (IYJ): ETF Research Reports
VIPERS-INFO TEC (VGT): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
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