Major equity indexes kicked off 2013 with a bang as politicians on Capitol Hill steered the nation away from the fiscal cliff in the nick of time. The bull train chugged along full steam ahead with little interruption until late May when Federal Reserve officials rudely reminded investors that they are considering scaling back on stimulus measures. Needless to say, the Fed delayed the much-feared taper and the bulls returned to the driver’s seat without hesitation for the rest of the year.
Some of the biggest developments that inspired volatile trading along the uphill ride this past year included geopolitical tensions in Syria, rampant sell-offs across emerging markets, Europe emerging out of recession, and Japan’s shift to a loose monetary policy of their own. Amid the frenzy of headwinds and catalysts, U.S. markets proved resilient and we expect for the broad-based bull trend to continue into the year ahead [see Looking Back At Our Rapid Fire Ideas for 2013].
As such, below we outline 14 ETF ideas that we feel are favorably positioned to prosper in 2014.
1. MSCI Germany ETF (EWG, A)
As the eurozone continues to recover from its debt crisis, analysts have grown cautiously optimistic on European equities in 2014. Though the currency bloc will likely face several headwinds throughout the new year, many have turned their attention to one particular country that managed to withstand the worst of the recession: Germany. According to Germany’s central bank, Bundesbank, the country is expected to grow 1.7% in 2014 as rising employment, strong private consumption, and an improved housing market continue to drive the economy. Analysts at Deutsche Bank also see the DAX 30 index rising to 11,000. For those wanting to tap into the German equity market, EWG is by far the largest and most popular option with over $5.7 billion in assets under management along with an average trading volume topping 2 million shares [see 101 ETF Lessons Every Financial Advisor Should Learn].
2. Golden Dragon Halter USX China Portfolio (PGJ, A)
2013 was not a kind year for emerging market equities, particularly those from BRIC nations like China. Next year, however, several analysts have noted that China may be able to regain its footing; a more optimistic growth forecast coupled with low inflation could allow domestic demand to lead the turnaround. For those who are still somewhat leery of a full China rebound, PowerShares’ PGJ may be a more compelling option as it tracks an index comprised of the U.S.-listed securities of companies that derive a majority of their revenue from China, which can help mitigate some of the risks associated with investing in foreign-listed securities.
3. Energy Select Sector SPDR (XLE, A)
Over the last few years, investors have witnessed the U.S. become a dominant force in the crude oil and natural gas space, thanks in part to rapid development in technologies. In 2014, the EIA expects U.S. crude oil production to rise from an average of 6.5 million barrels per day in 2013 to 8.5 million barrels per day in 2014. As the U.S. continues its path towards energy independence, analysts remain bullish on the industry. For those wanting to gain exposure to some of the biggest names in the business, like Exxon (XOM) and Schlumberger (SLB), XLE is a low-cost and popular option [see Energy Bull ETFdb Portfolio].
4. S&P 500 Pure Value ETF (RPV, B-)
With U.S. equity markets at all-time highs, investors have witnessed P/E ratios soar across nearly every corner of the market. Many analysts argue that it is perhaps too late to gain the lucrative returns seen over the past year. Since cherry-picking “cheap” stocks can be tricky and is a rather risky endeavor, Guggenheim’s “pure value” approach may be a compelling option. This fund narrows its focus on those funds that only display strong value characteristics, such as low price-to-book and low price-to-earnings ratios, essentially eliminating the overlaps between growth and value [see 3 Market Valuation Indicators ETF Investors Must Know].
5. Silver Trust (SLV, C+)
Silver was one of the worst performing assets in 2013, as investors increased their risk appetite for equities and left the commodity out to dry. As a result, silver and SLV alike surrendered more than 30% in 2013. This pick is for the contrarians out there looking to buy in at a possible bottom. Any kind of economic slip or bad news in 2014 could send investors rushing back to precious metals, and SLV’s attractively low price stands to reap those rewards. This play will no doubt be volatile, but for those who can stomach a bit of risk, there is the potential for a handsome reward.
6. IPOX-100 Index Fund (FPX, B)
As markets continue to heat up, IPOs have been popping up left and right, as private companies look to cash in on the overall market’s success. This will likely continue to be a theme in 2014 as long as a bearish pressures don’t sweep over the market. FPX has been handily outperforming SPY over the past few years, giving it an even greater appeal. Though we may not see an initial offering the size or magnitude of Twitter in 2014, IPOs will continue to be a prevalent force, putting FPX in a great position for the year.
7. US Dividend Equity ETF (SCHD, A)
Dividend investing has been a theme for the past few years, and with interest frozen until at least 2015, that trend will continue in 2014. There’s a lot to like about SCHD; it charges just 7 basis points for investment, outperformed SPY in 2013, offers a 2.5% yield, and only holds companies that have a history of consistently raising dividends. Note, SCHD is not a high yield play, but rather one that invests in stable dividend payers for those looking for predictable income. That being said, it is one of the best dividend products on the market and is poised for another strong 12 months next year [see 101 High Yield ETFs For Every Dividend Investor].
8. Consumer Staples Select Sector SPDR (XLP, A)
This one’s for those who fear Yellen and that the taper will continue into 2014. Some investors and analysts feel that if the Fed tapers further in 2014, stocks will slip-off and may even spark a recession. Consumer staple stocks have always held out during recessions better than their peers, but they also leave you the possibility of keeping close pace should the bull market continue. Think of XLP as something of an in-between play; should stocks rally, XLP will lag slightly behind broad benchmarks, but a major correction will likely see XLP keep losses smaller than markets [see also Consumer Centric ETFdb Portfolio].
9. TrimTabs Float Shrink ETF (TTFS, B)
Interest in actively-managed products has been on the rise as more and more investors have grown comfortable with using instruments that fall outside the traditional, passive, “plain vanilla” wrapper. TTFS has made its way onto our radar screen for the year ahead after posting impressive returns, and more importantly, beating its benchmark index by a meaningful margin over the past year. This ETF uses “Liquidity Theory” as opposed to a traditional market capitalization-weighted approach when constructing its underlying portfolio; the fund focuses on equities with a decreasing number of outstanding shares and increasing profitability.
TTFS gained 38% in 2013 (as of 12/18/2013) compared to its benchmark, the Russell 3000 Index, which gained only 26% over the same time period. This trend of outperformance dates back to the fund’s inception, which further adds merit to its active strategy.
10. MSCI Mexico Capped ETF (EWW, A)
Investors seemingly lost all hope for emerging markets in the first half of 2013 as concerns over China’s slowing growth rate prompted rampant profit taking across foreign markets. Furthermore, prospects of rising rates at home prompted many to shift back to domestic securities in light of the improving growth outlook. The flight out of developing markets has in turn created a lucrative opportunity for the year ahead, although having a stomach for risk is absolutely necessary [try our Free ETF Country Exposure Tool].
We think that the Mexico ETF can shine bright in 2014 so long as the U.S. economic recovery continues to pick up steam; unlike Brazil, Russia, and India, which are heavily dependent on China, Mexico boasts closer ties with the U.S., thereby making this somewhat of a hybrid “domestic-developing” play. With over three-quarters of Mexico’s exports going to the U.S., we feel that EWW boasts lucrative growth potential and is currently the best “pure play” option for those looking to invest just south of the border.
11. Robo-Stox Global Robotics and Automation Index ETF (ROBO, n/a)
With the U.S. economic recovery expected to take deeper root in 2014, we feel that cyclical industries in the technology sector, namely ones that rely heavily on business investments, are favorably positioned to profit from improving conditions. Growing corporate cash piles will further prompt businesses to start ramping up expenditures once again as the clouds of uncertainty become more scattered. One of the most compelling business expenditures that more and more companies are beginning to consider is investing in robotics and automation to help streamline their operations.
The recently launched ROBO ETF presents investors with a clear-cut way to tap into one of the most lucrative segments of the technology sector by offering hyper-targeted exposure to robotics-related and/or automation-related companies from around the globe. While its price tag is certainly steep for an ETF, ROBO is currently the only “pure play” option for those looking to tap into the growing robotics market.
12. Industrials/Producers Durables AlphaDEX Fund (FXR, A-)
Growth sensitive U.S. stocks have definitively taken the lead from defensive ones as investors have embraced the economy’s shift from the early to mid-cycle expansion phase. Improving manufacturing data suggests this transition is very real and the domestic manufacturing renaissance has been further aided by company efforts to remain cost-competitive. We feel that the domestic industrial sector is poised to post strong returns in 2014 as growth continues to pick up and we are aligning this theme with a “best of breed” ETF.
FXR from AlphaDEX employs a rigorous stock selection methodology to select industrial stocks from the Russell 1000 Index. The results are quite impressive as this ETF has managed to outperform its broader and more popular counterpart, the Industrial Select Sector SPDR (XLI, A), by a margin of nearly 30% since the market bottom in 2009, and by nearly 9% in 2013 alone.
13. Senior Loan Portfolio (BKLN, B+)
We’re putting BKLN back on the list even after its lackluster performance this year seeing as how the ETF offers exposure to an asset class that we feel was wrongfully beat down following the “taper scare” seen in late March of 2013. BKLN’s underlying portfolio is comprised of senior bank loans, which are perhaps best described as “high-yield debt notes with perks” [see our Monthly Dividend ETFdb Portfolio].
Senior bank loans differ from traditional junk bonds in two ways; first and foremost, these debt issues are floating rate, which makes them more attractive to hold as we enter a period of rising interest rates. Second, these debt issues are also secured by collateral in the event of a default. While it’s true that senior bank loans don’t yield as much as their junk bond counterparts, their other traits certainly make them one of the most compelling securities in the fixed income market for the year ahead.
14. Timber ETF (CUT, A-)
Inflation fears have been largely put on the backburner as suppressed commodity prices and lackluster economic growth haven’t given investors much reason to scramble for the safe havens. While most experts don’t anticipate for inflation fears to resurface in 2014, we’re taking the “better safe than sorry” approach when it comes to rising prices. Timber has served as a formidable hedge against inflation over the long-haul, while its uses in the homebuilding industry should further bolster demand for this resource as the recovery picks up steam.
CUT offers a way to invest in the global timber industry by providing exposure to firms that own or lease forested land and harvest the timber for commercial use and sale. The ongoing housing market recovery coupled with the potential threat of inflation should bolster this ETF higher in 2014.
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Disclosure: No positions at time of writing.