Strategist's 3 Best Picks Include These Bond, Emerging-Market ETFs

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Moderate growth and low inflation in the U.S. have led to much discussion among pundits about the so-called Goldilocks Economy.

Unemployment and interest rates remain low, yet GDP growth is steady and stock prices have been rising. A too-hot economy can cause inflation, while a too-cold economy can result in a recession.

We are currently treading water somewhere in between, says Philip Blancato, CEO and president of Ladenburg Thalmann Asset Management, which manages about $2.2 billion. He sees room for continued earnings and economic growth - particularly if President Trump can follow through on his campaign promises.

Here are Blancato's three best ETF investment ideas, in his own words:

The current market environment is similar to the Goldilocks children's story. The economy is not too hot, not too cold, but continues to be in the middle. Overall economic data continue to ebb and flow as with each trend higher, there is a subsequent move lower.

The current P/E ratio of the S&P 500 is roughly 21.5 times, while the historical 10-year average P/E ratio is roughly 17.5 times. And prices tend to be mean-reverting, so we would not be surprised to see a sell-off at some point this year if investors become uncertain of Trump's ability to implement his planned pro-growth policies. As of last quarter, earnings are improving and if this trend continues will likely move higher.

  • JPMorgan Diversified Return International Equity ( JPIN ). This fund is passively managed to a FTSE index developed by J.P. Morgan Asset Management to provide exposure to developed international equities. JPIN uses a top-down risk allocation framework, which equally distributes portfolio risk across 40 regional sectors, and a ranking process that focuses on value, size, momentum and low-volatility factors. The construction methodology entails monthly rebalancing, liquidity screens and turnover constraints.

Now, with more investment opportunities presented in the international developed markets, although not without potential volatility due to the numerous uncertainties, it is prudent to enter and add to the space via a less risky channel. In our opinion, JPIN is a channel to enter the international space to participate in the upside from economic recovery without taking on excessive risks. The year-to-date performance as of April 30, 2017, is 10.35% vs. the MSCI EAFE index, which is up 9.97%.

Political uncertainty in the U.S. also make diversifying internationally more compelling. For instance, Trump is the first president post-WWII with a net negative approval rating: 39.1% approve/54.8% disapprove (in the first few weeks in office). Much of the optimism that fueled the "Trump rally" was centered on the belief in the new administration's ability to enact its aggressive agenda. This is now being overshadowed by the perceived shortcomings of the administration, such as failure to repeal and replace the Affordable Care Act.

There are also geopolitical events such as the bombing in Syria and the change in rhetoric toward North Korea.

  • Columbia Emerging Markets Consumer ETF ( ECON ). ECON attempts to capture the demographic trend in developing countries, which is expected to significantly boost consumption over the next decade, by focusing on the consumer sectors of emerging markets. Further, the emerging consumer may stand to benefit as many emerging economies transition from an export-based economy to an economy that relies more on domestic spending, as exhibited in developed countries.

The ETF seeks to track the price and yield performance of the Dow Jones Emerging Markets Consumer Titans 30 Index, which measures the performance of 30 leading emerging-market companies in the Consumer Goods and Consumer Services Industries as defined by S&P Dow Jones Indexes.  This ETF is up 14.48% year-to-date through April 30, 2017, while the MSCI Emerging Market index is up 13.88% over that same time period.

Lackluster U.S. economic data include real GDP growth coming in at an annualized 1.2% in Q1. Developed markets are expected to grow GDP 1.9% in 2017 and 2% in 2018. GDP growth forecasts for emerging markets is even higher at 4.5% for 2017 and 4.8% for 2018.

  • Fidelity Total Bond ETF ( FBND ). This actively managed ETF is based off Fidelity's Total Bond Fund ( FTBFX ), which has a long-term track record of strong risk-adjusted returns. We use this strategy as a core fixed-income allocation to diversify and lower interest-rate risk. FBND has an attractive 30-day SEC yield of 2.34% and a duration of 5.44 years.

FBND has navigated volatile fixed-income markets, and we believe its actively managed approach can adapt to future rate hikes. Year to date through April 30, 2017, FBND has returned 2.11%, outperforming the Barclay's Aggregate Bond Index, which is up 1.59% over that same time period.

Interest-rate futures are pricing in more rate hikes this year, with a 85.9% probability of the fed funds rate ending the year between 1% and 1.5%

None of the recent data has fundamentally changed our view on the economy. We're still positive on domestic equities, and we believe there will be modest earnings growth this quarter. Earnings looked strong this past quarter with 487 of 498 companies reporting. Earnings growth came in at 14.75% and sales growth at 7.93%. GDP growth should be modest moving forward, between 2% and 2.5%. The labor market remains tight, as unemployment is at 4.5%, and inflation remains contained.

We still think there is room to grow, especially if the new administration can deliver on some of its campaign promises, such as tax reform and increased infrastructure spending.


3 Best ETF Ideas Tap Earnings Growth, Dividends

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
Referenced Symbols: JPIN , ECON , FBND , FTBFX

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