Weathering Economic Headwinds: ETFs To Prepare Like Bill Gross

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This month, legendary bond king Bill Gross published his investment outlook, aptly titled “Strawberry Fields – Forever?”, in which he warned investors to be prepared to face some “structural economic headwinds” in the next few years. In addition to the aftermath of the 2008 financial crisis we still feel today, diminished productivity gains and the looming fiscal cliff, Gross points out other blaring red flags that investors need to pay attention to, as these critical factors will likely hamper economic growth in not only the United States, but also in other developed nations around the globe [see 101 ETF Lessons Every Financial Advisor Should Learn].

In recent years, the United States has experienced lackluster growth and painfully

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Weathering Economic Headwinds

high levels of unemployment, and, at this point in time, our road to recovery still seems quite far away. Gross, however, states that there are other underlying problems that will likely prevent real economic growth, or what he identifies as structural economic headwinds: namely debt, globalization, technology and demographics. The debt issue is perhaps the most obvious one, as the reduction of our nations’ and the eurozone’s debt piles will be felt by all for years to come. Globalization and technology being identified as “issues” may be surprising to some, as these two phenomenons usually have more positive connotations. Though globalization has certainly been a “historical growth stimulant,” the vast and complex web of interconnected relationships has also hindered us, as economic turmoil in one nation almost always spills over into the next.

Technology too has been a key factor in propelling our global economy, but with that comes the sacrifice of millions of workers being replaced by machinery and robotics. This “technological unemployment,” more commonly referred to as structural unemployment, may be what prevents us from reaching levels close to our full potential, or even some sort of economic relief. In regards to demographics, Gross notes that the aging population found in most developed economies will likely lower productivity and employment growth rates, as well as personal consumption [see also Baby Boomers ETFdb Portfolio].

Gross’ Picks For Weathering The Storm

In response to what exactly investors should be doing to protect their portfolios for the “structural economic headwinds,” Gross puts an emphasis on pinning down those investments that can produce real returns. His picks include U.S. inflation-protected bonds, high quality municipal bonds, and non-dollar emerging market stocks. For those who are in the bond king’s camp, which likely is almost everyone, keeping a close eye on these ETFs may certainly be worthwhile [Download How To Pick The Right ETF Every Time]:

  • Barclays TIPS Bond Fund (TIP): This ETF is by far the largest and most popular inflation-protected bond fund, with over $22 billion in total assets and an average daily trading volume of over one million shares.
  • SPDR DB International Government Inflation-Protected Bond ETF (WIP): Another popular option, this fund offers investors access to inflation-linked government bonds from developed and emerging market countries outside of the United States.
  • SPDR Barclays Short Term Municipal Bond ETF (SHM): This investor favorite focuses on short-term munis, including state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. Of the nearly 400 individual holdings, roughly three-quarters of the bonds are rated AA, while the remainder are AAA.
  • SPDR Barclays Municipal Bond ETF (TFI): Similar to SHM, this fund also provides exposure to high quality municipal bonds, but its portfolio features a diverse range of maturities, from one year to over 30 years [see our Financials Free ETFdb Portfolio].
  • db-X MSCI Emerging Market Currency-Hedged Equity Fund (DBEM): This ETF is designed to provide exposure to equity securities in the global emerging markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies. It currently features exposure to 21 countries, with top allocations going to equities from China, South Korea, Taiwan and Brazil.

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Disclosure: No positions at time of writing.

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