Investing Investing in ETFs
In a recent Barron’s story, “The Pros Pick 20 ETFs for Today’s Market,” four top money managers shared their picks for the best ETFs to buy now. We sifted through all 20 of them to highlight three standout funds.
For a backdrop on their rationale in picking these ETFs, and as part of our reasoning in narrowing down to the three best ETFs to buy now, the panel considered year-to-date 2016 market action and what to expect in the near term.
The year began with a 10% decline in the S&P 500 index but has since recovered and is now sitting near record highs. But weak global economies and what appears to be a softening U.S. economy has placed a large cloud of doubt over the future direction of capital markets.
Therefore the 2016 market is one of the most challenging in recent memory. The downside risk in the short term may just as great as the upside potential and volatility is sure to remain in the mix.
3 Best ETFs to Buy for the Rest of 2016
Among the 20 best ETFs cited by the Barron’s panel of money managers, we found three that can take advantage of various investor needs:
- VanEck Vectors Gold Miners ETF (NYSEArca: GDX): With the Federal Reserve and the central banks around the world adopting a “lower for longer” interest rate policy, the debasing of currencies has returned and therefore demand for gold has also increased. But the investors are more interested in financial assets, such as stocks, than they are interested in hard assets, such as gold bullion. Gold miners are up 80% and gold is up 20% year-to-date. If current macroeconomic trends continue, ETFs like GDX will continue to do well.
- iShares USA MSCI USA Minimum Volatility ETF (NYSEArca: USMV): If the rest of 2016 looks anything like the first four-plus months, ETFs like USMV that weed out the market’s most volatile stocks will be smart plays. Since USMV focuses on high-quality stocks with less volatility than market-cap weighted index funds, it could outperform in a downturn. Year-to-date USMV is up 7%, whereas the S&P 500 is up a mere 1.8%.
- iShares Core MSCI EAFE ETF (NYSEArca: IEFA): Investor sentiment in 2016 has been generally “risk-off,” which means foreign stocks have had a tough year. But not all investors are short-term investors and investing overseas can play an important role in portfolio diversification. Therefore now can be a good time for long-term investors to buy more shares of foreign stock ETFs like IEFA, which tracks the broad MSCI EAFE index and does so at one of the cheapest expense ratios at 0.12%.
The Rest of the List
Most of the other 17 ETF picks by the pros had similar objectives as these three, with exception of a few ETFs that concentrated in certain countries, such as iShares MSCI Canada (EWC) and iShares MSCI Australia (EWA).
I found it interesting but questionable that only three out of the 20 ETFs were bond funds and all three of them were high-yield, which is a fixed-income area that has done well year-to-date but can also fall quickly in the face of a weaker global economy. Therefore the short-term risk may not be worth the short-term gain with junk bonds, and that’s assuming the gains haven’t already been put it.
As with any list like this, whether it is ETFs, mutual funds, stocks, or anything outside of the financial world, there are always selections that are arguable and some that are not on the list but should be there.
Personally and professionally, I prefer to have a few solid but boring index funds for core holdings and then build around them with sectors for diversification.
Kent Thune is the owner of an investment advisory firm in Hilton Head Island, S.C. He personally does not hold any of the aforementioned securities. Under no circ*mstances does this information represent a recommendation to buy or sell securities.
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