As we round out the year, exchange traded fund investors should take a look at how they are positioned and begin thinking about any adjustments they should make going into the new year.
For 2015, investors may consider including a hedged Europe strategy to capture a growing Eurozone while diminishing currency risks, diversify with the relatively cheap emerging markets, and protect against bad turns with a short-duration bond fund.
For starters, something like the WisdomTree Europe Hedged Equity Fund (HEDJ) can provide investors with a more pure exposure to moves in the Eurozone by diminishing the negative effects of a depreciating euro currency.
The ETF hedges against the euro currency and would outperform a non-hedged Europe equity ETF if the euro currency depreciates. Potential investors should note that these ETFs could underperform a non-hedged ETF in the event the euro strengthens. [Why Invest in Europe ETFs]
So far this year, the euro has depreciated 9.6% against the U.S. dollar. Meanwhile, the iShares MSCI EMU ETF (EZU) , which tracks company stocks from the European Monetary Union and does not hedge against currency risks, has declined 4.1% year-to-date, whereas HEDJ has gained 6.8%.
Investors can also take a look at the PowerShares FTSE RAFI Emerging Markets Portfolio (PXH) as a relatively cheap way to capture the emerging markets.
After the bull run, U.S. stocks are either fairly priced or beginning to look expensive. For instance, the S&P 500 Index has a 17.6 price-to-earnings ratio and a 2.5 price-to-book. In contrast, the emerging markets seem relatively untouched. The MSCI Emerging Markets Index has a 12.2 P/E and a 1.5 P/B. [Emerging Market ETF As A Contrarian Play]
Moreover, due to its fundamental indexing methodology, PXH leans toward value stocks. Consequently, it shows a relatively cheap 9.2 P/E and a 1.2 P/B.
Lastly, investors can use something like the Guggenheim Enhanced Short Duration Bond (GSY) as an alternative to money market funds with close to zero percent yields. The actively managed GSY has an ultra-short 0.27 year duration but comes with a 1.28% 30-day SEC yield.
The ultra-short-duration bond ETF can be used to weather a rising rate environment. Furthermore, if the consumer prices continue to fall and we end up with persistent deflationary pressures, the purchasing power of the U.S. dollar increases. Consequently, investors can also look at a short-term ETF that act as cash alternatives. [ETF Options to Hedge Against Falling Prices, Low Inflation]
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.