We asked several investment strategists to share their one
best ETF that investors should consider buying for 2014.
Best Foreign ETFs
1. Alan Rosenfield, managing director at Harmony Asset
Management in Scottsdale, Ariz. with $75 million in assets under
Most of the Street, from Pimco toJPMorgan (
) is projecting growth next year in the range of 3.25% and a
stock market return between 10% and 15%. The surprise will be
looking where most others are not. We have been buyingiShares
MSCI Mexico (
While most U.S. newspapers carry stories about gangland
murders, what is really going on in Mexico is very different. For
the past year, Mexican politicians have been showing up our own
Congress by actually working together to strengthen their
Just recently, both houses approved allowing foreign
investment in their oil industry -- an industry that has been
closed to outsiders for more than 70 years. Mexico is one of the
largest producers of oil in the Americas, and adding capital and
know-how could improve their output dramatically.
Mexico has also started changing banking, education, labor and
telecommunication regulations to free up its economy. There is
even talk about allowing noncitizens to own real estate.
That is a lot in a single year, and don't kid yourself, this
is just the beginning of what will be a struggle to reduce the
power of many special interests that benefit from the status quo.
But such moves will ultimately provide powerful stimulus to the
Mexico now produces products more cheaply than China, and it
costs far less to ship from Mexico to the U.S. than from China.
In addition, the economic and political friction between China,
the U.S. and our allies will provide further interest in having
production operations somewhere besides Asia.
Finally, if the Street is correct and Europe starts to grow
next year and the U.S. increases its growth, Mexico will have
added wind at their economic back.
2. Stephen Blumenthal, CEO of CMG Capital Management Group in
King of Prussia, Pa., with $500 million in AUM.
The ETF with the most upside potential over the next several
years isProShares Ultra Short Yen (
Japan is one of the most heavily indebted developed countries
on the planet. Its total debt to gross domestic product is over
500%, compared with the U.S.'s 365%. Japanese gross sovereign
debt is around 240% of GDP -- numbers that are substantially
higher than most of the developed countries. They are borrowing
to finance over 50% of their government spending. Japan's public
debt breached 1 quadrillion yen this past summer.
Japan is at a significant disadvantage with too much debt, not
enough revenue, and disproportionally poor demographics to grow
the revenue Japan needs to increase growth, increase revenue
(taxes) and do it in the face of an aging population. Not only
does an elderly population consume less, they earn less and thus
pay less tax. Japan's population is shrinking.
The reality is that Japan is completely insolvent. The U.S.,
E.U., U.K. and China are all in some form of debt-related crisis
and are all printing at the same time. It is doubtful that South
Korea and Singapore sit idle and say "sure, take our sales." They
too will devalue to maintain global positioning.
We are in a global currency war, and such wars have a history
of lasting a long time. The common problem is unmanageable debt.
There will be points of crisis, and I believe Japan is next to
step on stage. The Japanese yen sits in the least competitive
position globally, especially in comparison to the U.S.
3. Gary Gordon, president of Pacific Park Financial in Ladera
Ranch, Calif., with $115 million AUM.
The S&P 500 will rise from current levels to top 2100 at
some point in 2014, though it will finish closer to 1975. It will
be a much rockier ride than 2012 or 2013 due to the heavy
spotlight on how much and when the U.S. Federal Reserve shifts
its rate policies.
Rate sensitivity will create greater volatility than investors
currently think. The primary catalyst that will drive the market
higher, though, is an extremely measured, very slow Fed exit from
QE, meaning that they will be relatively successful at keeping a
lid on interest rates in 2014.
As long as the 10-year Treasury note does not rise beyond the
3.25% level, investors will continue to put more money to work in
stock assets. Due to valuation concerns, however, I give the nod
to a foreign ETF that will benefit both from the Fed's measured
exit and the European Central Bank's increased
stimulus.WisdomTree Hedged German Equity (
) offers exposure to some of the best German brands (e.g.,Daimler
),Siemens (SI),Bayer (BAYRY), etc). Germany is the best in
regional breed. A price-to-sales ratio of 0.6 is a huge bargain
relative to what's out there. And investors do not have to worry
about fluctuations in the value of the euro.
But U.S. is slowly tapering quantitative easing. Europe, on
the other hand, is still cutting and stimulating. The dollar will
strengthen against the euro, helping DXGE. Declines in the euro's
value increase exports. Investors will play the global central
bank policy game as long as the Fed doesn't tighten too fast.
4. Daniel Beckerman, president of Beckerman Institutional in
Oakhurst, N.J., with $45 Million in AUM .
Emerging market stocks have lagged other asset classes so far
this year. The year-to-date return for theiShares MSCI Emerging
Markets (EEM) is -5%. In contrast, the S&P 500 soared over
However, I view emerging market stocks as a classic
contrarian/value play. They are out of favor and they are cheap.
Emerging market stocks trade at a price-to-earnings ratio of
about 12. This places them at about a 25% discount to U.S.
stocks. Although much has been said about their recent
underperformance, emerging market stocks have enjoyed superior
returns to U.S. stocks in eight out of the last 10 full calendar
Furthermore, although there have been concerns about a
slowdown in China and India, the growth rate of the emerging
markets, overall, trumps that of the developed world. It is also
the developed world that now has the largest debt imbalances,
whereas the emerging markets are in better shape.
My ETF pick for 2014 would beWisdomTree Emerging Markets
Small-Cap Dividend (DGS). Because it invests in smaller
companies, you have more direct exposure to companies that are
selling products and services directly to the emerging markets
The larger companies tend to do more business in the U.S.,
Europe and Japan. The P/E ratio for DGS is about 12. Therefore,
it is not trading at a premium to emerging market stocks
generally. And small companies tend to outperform larger ones in
the long run.
Also, because the ETF overweights dividend-paying securities,
you end up with more exposure to shareholder-friendly companies.
In terms of performance, DGS has beat out its general emerging
market counterpart ETFs such as EEM over the past five years and
since it was launched in 2007.
The risks in this space are that emerging markets behave with
more volatility than the U.S., so they can be subject to more
downside in a sell-off. Also, it is possible for the relative
outperformance in developed-market stocks to continue in the near
However, this probability is more than priced in. I expect to
see relative underperformance in both U.S. stocks and bonds
compared to the emerging market world.
5. John Forlines, chairman of JAForlines Global in Locust
Valley, N.Y., with $411 million in AUM.
While U.S. bank stocks have largely recovered from the Great
Recession, European banks remain priced for depression. As a
result, we favor owning European financial stocks throughiShares
MSCI Europe Financials (EUFN), which owns European banks,
insurers and diversified financial firms.
Pro-austerity governments have been defeated in many
countries, and even Germany will likely ease its stance on the
issue with German Chancellor Angela Merkel's center-right CDU/CSU
party (Christian Democratic Union of Germany and the Christian
Social Union of Bavaria) forming a "grand coalition" with the
center-left SPD party (Social Democratic Party) following this
The easing of austerity measures across the continent has been
ongoing, but its positive effects have just begun to be realized.
Eurozone GDP growth has turned positive and many leading
indicators suggest that a further strengthening of economic
conditions is in order. With sovereign bond yields in crisis
countries having fallen significantly, we expect a further easing
of austerity measures, which should continue to stimulate
We expect the European Central Bank to act much more
aggressively if signs of a new crisis emerge. The days of wooden
insistence by the ECB that crisis countries save their banking
systems on their own have passed. Even absent renewed crisis, we
expect additional accommodation to be provided by the ECB next
Disinflation has been the dominant force in the eurozone since
late 2011 and some countries have entered or are on the edge of
outright deflation. There are three policy measures that the ECB
can employ to help generate inflation, which is badly needed to
help bring down debt burdens in many countries. First, a third
round of the ECB's long-term refinancing operations would help
buffer banks' balance sheets and enable them to increase lending.
Second, the ECB could employ negative interest rates on deposits
held at the ECB to encourage banks to make loans rather than
hoard cash. Third, the ECB could follow the lead of the other
major central banks and pursue a policy of asset purchases.
The latter two policies would be controversial, but we believe
the ECB would implement them if necessary to prevent deflation.
If we are right in our assumptions, then European bank stocks are
undervalued and 2014 may see their valuations driven much
6. Charles Freeman, portfolio manager at Holderness
Investments Company in Greensboro, N.C. with $106 million in
For 2014, we are looking atWisdomTree Europe Hedged Equity
(HEDJ). Europe has started a tentative recovery, and we look for
momentum to accelerate next year. After coming out of recession
earlier this year, PMI numbers show expansion in Eurozone
manufacturing and confidence is firming. The recovery is not
exactly even, with Germany leading and France slipping in many
categories. Still, European Cental Bank President Mario Draghi is
keenly aware of the fragility, and has committed that the ECB
will step in as necessary. A significantly lower-than-expected
inflation number in October has sparked comparisons to Japan in
the 1990s. Draghi swiftly cut the main refinancing rate to 0.25%
in response, and we think the ECB will do much more in an effort
to avoid a deflationary cycle.
Politically, there have been several positive developments
that should support the recovery into 2014. Angela Merkel was
able to prevail for a 3rd term and negotiate a coalition
government in Germany. Progress has been made regarding a banking
union, which will certainly help confidence going forward. The
ECB has already been named supervisor to the region's largest
banks, and will begin financial reviews next year. Further,
finance ministers are very close to an agreement on an agency and
fund to support troubled banks in the future.
Lastly, the main reason why we like HEDJ vs. another Europe
ETF is that the euro effects are hedged. We think the euro may
depreciate in 2014, so U.S. investors would want to hedge the
currency effects. With the ECB's commitment to more stimulus, and
the uneven recovery among countries; we think that more will be
done regarding monetary policy next year which should pressure
the euro. Also, with the Fed beginning to taper, we expect the
dollar to appreciate against the euro. So by hedging the euro,
positive returns in Europe should be augmented.
7. A. Gary Shilling, president of A. Gary Shilling & Co.
in Springfield, N.J.
My recommendation for 2014 is currency-hedged Japanese
equities as tracked byWisdomTree Japan Hedged Equity (DXJ).
Unlike his predecessors in recent years, Prime Minister Abe
retains enough voter backing to override the powerful but
cautious government bureaucracy to implement his three arrows. He
hopes that massive central bank purchases of government
securities, substantial government spending and structural reform
will propel the economy out of its two-decade-long deflationary
depression. The first two are easy to implement since Abe
installed his backers as the Bank of Japan's leaders, and fiscal
stimuli already have been emphasized for two decades.
Structural reform is tough since Japan was ruled by military
feudalism until the 1850s, when the U.S. forced her to open to
the West. That led to forced industrialization and the facade of
Westernization, but feudalistic attitudes remain.
Japan's low fertility rate and zero-immigration policy are
already causing population and workforce declines. Women are an
obvious source of new employees, but they didn't work outside the
home during feudalism and Japan's female labor participation rate
is among the lowest of developed countries.
Japan's lifetime employment system follows from feudalism, in
which people are tied for their natural lives to their liege
lords. Lifetime employment commitments by major businesses in
Japan, of course, deter hiring except for temporaries and,
therefore, impede efficiency.
Corporate takeovers also spur efficiency, but are shunned in
Japan, where takeovers in feudalism were military and involved
the horrors of war. Land is the economic base in feudalism, and
its carry-over makes agricultural land reform in Japan very
difficult. This is especially true in rice farming, where small
plots are common, producers are heavily subsidized and imports
Political divisions in feudalistic domains aren't normally
based on proportional population, and that's still the case in
Japan. Because the Liberal Democratic Party controlled Japan for
most of its postwar history and received much of its support from
rural areas, those districts generally have greater
representation in the parliament, the Diet, than do urban
Some rural districts have only a few thousand people but one
representative, while some districts in major cities with
hundreds of thousands also have just one representative. As a
result of agriculture's tremendous political power, river beds in
rural areas are paved while needed airport and highway
investments in Tokyo wait.
Still, Abe's efforts to stimulate economic growth, eliminate
debilitating deflation and trash the yen to benefit exporters
should be enough to propel Japanese stocks in 2014.
Currency-hedged equities avoid giving back in foreign exchange
losses the gains in yen terms.
Best U.S. ETFs
1. Neena Mishra, director of ETF Research at Zacks Investment
Research in Chicago, Ill.
U.S. stocks had an excellent performance during 2013. I expect
2014 to be another good year for stocks, though it will probably
not be as spectacular as this year.
There is no doubt that quantitative easing has been a major
force behind the market's rally this year but the start of
tapering signals that the economy is now strong enough to
withstand the gradual withdrawal of the Federal Reserve's
A healing labor market, improving housing market, lower energy
prices and still very accommodative monetary policy are expected
to further support the market, while the fiscal uncertainty
continues to pose some head winds.
At current levels stocks are not cheap, but they are not
expensive either, specially compared with most other asset
classes. Further, corporate earnings will grow as the economy
A gradual rise in interest rates is good for stocks in
general, but some sectors will do better than others. Industrials
and technology are among the sectors that do well when the
economy grows, and on the other hand, rate-sensitive sectors will
Also, once the QE begins to fade away, investors will turn
their focus on fundamentals and only the "better" or
"high-quality" stocks will shine. Academic research shows that
high-quality companies consistently deliver better risk-adjusted
returns than the broader market over the long term.
My pick for 2014 is iShares MSCI U.S.Quality Factor (QUAL).
QUAL identifies high-quality stocks on the basis of three main
fundamental variables: high return on equity, stable
year-over-year earnings growth and low financial leverage.
Apple (AAPL),Google (GOOG) andJohnson & Johnson (JNJ) are
the top three holdings of the fund, while technology takes about
40% of the asset base.
I like the ETF's focus on larger, stable, cash-rich companies
in industries that typically perform well in the higher-growth
environment. With the economic growth picking up in the eurozone,
Japan and China, large-cap companies that derive almost half of
their revenue from the outside of the U.S., may perform well.
They also look attractive compared with the small-cap companies
on a valuation basis. However, they may underperform if investors
continue to favor high-beta, domestically focused stocks.
2. Joe Barrato, CEO of Arrow Investment Advisors in Olney,
Md., with $621.3 million in AUM.
With Fed tapering on the horizon, interest-rate risk will
continue to challenge investors to seek alternative sources of
income, with the search for yield remaining a driving theme in
2014. Since roughly two-thirds of fixed-income issuance occurs
outside the U.S., we believe a global approach to fixed income
makes sense for purposes of yield, return opportunities and
We also see improving global growth next year, which may
benefit international equities, particularly in developed
countries where valuations and fundamentals remain relatively
Concerns over rising interest rates have led some investors to
reduce the duration of their fixed-income holdings in an attempt
to reduce volatility. One approach is to take duration out of the
equation by looking for alternatives to traditional bond
investments. With interest rates at or near an all-time low,
investors' fears about rising interest rates are justifiable,
making a multi-asset approach to yield attractive next year.
As such, we continue to talk with investors aboutArrow Dow
Jones Global Yield (GYLD), which offers a competitive yield
(30-day SEC yield of 6.04% and distribution yield of 7.22% as of
Dec. 17) along with multiasset exposure to potential growth
opportunities on a global scale. In addition to global equity
exposure, GYLD provides equal weight exposure to global sovereign
debt, global corporate debt, global alternatives such as master
limited partnerships (MLPs) and global real estate.
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