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Is It the Right Time to Try Riskier ETFs?

Sweta Jaiswal, FRM

Wall Street continues to soar high on Sino-US trade war talks, release of some encouraging US economic data and a decent earnings season. In such a scenario, funds with exposure to emerging markets, commodities and other riskier assets are gaining popularity among investors. In fact, per a Wall Street Journal article, emerging-market stocks and oil have each gained around 7% since Beijing and Washington agreed on a partial accord in October (read: ETF Strategies to Gain as Wall Street Opens at a Record High).

Let’s assess the current market conditions:

The United States and China announced the phase-one trade deal in mid-October. However, both the sides are still engaged in negotiations on the terms of the trade deal agreement. China’s commerce ministry, represented by Gao Feng, recently expressed both countries' readiness to roll back the tariffs in phases. But, the Chinese government body did not specify any timeline. Meanwhile, President Trump announced that America doesn’t wish to roll back tariffs on China in order enter the deal. However, it is being speculated that Beijing is contemplating the removal of restrictions on U.S. poultry imports. Also, the buzz is that United States might scrap the scheduled Dec 15 tariffs on around $156 billion worth of Chinese imports, covering cell phones, laptop computers and toys (read: Phase 1 Trade Deal or Not: ETFs to Ride the Trend).

Impressive U.S. economic data is adding to the strength of U.S. dollar. Notably, gauges for sales, new orders and employment showed improvement from September. Moreover, the U.S. economy grew an annualized 1.9% in the third quarter of 2019, surpassing expectations of 1.6%, following a 2% uptick in the previous three-month period. Also the Institute for Supply Management (ISM) recently announced fresh figures for its service index for the month of October. The readings surpassed expectations. Per the ISM index, the service sector has been growing for 117 consecutive months (read: ISM Services Index Rebounds in October: ETFs in Focus).

Furthermore, the robust jobs data report for October has instilled optimism among investors. In October, U.S. employers added 128,000 new jobs, after an upwardly revised 180,000 gains in September. The latest number beat market expectations of 89,000 (read: Sector ETFs to Win After Robust October Jobs Data).

Also, the third-quarter earnings season has been quite decent, per the Earnings Trends  issued on Nov 8. Per the report, out of the 447 S&P 500 members that have reported results, 72.5% have surpassed earnings estimates and 57.9% beat revenue estimates.

As expected, the Fed has implemented this year’s third rate cut since July in its October meeting. The central bank slashed the benchmark interest rates by a modest 25 bps to 1.50-1.75%. The move sent the S&P 500 to a record high. Moreover, easing monetary policies is being observed in countries like South Korea, Indonesia, India, Turkey and South Africa in order to keep signs of a slowdown at bay. In October too, countries like Brazil, India and Russia cut rates.

ETFs in Focus

In such a scenario, we highlight ETF categories that are gaining popularity:

Emerging Market ETFs

Going by FactSet data as quoted on Wall Street Journal, investors have started pouring money into the iShares MSCI Emerging Markets ETF EEM recently, driving assets under management to the highest level in months. Since October, EEM amassed about $330.6 million in assets while SPDR S&P 500 ETF SPY shed about $2.20 billion. Thus, in order to tap emerging markets, investors can opt for ETFs like Vanguard FTSE Emerging Markets ETF VWO, iShares Core MSCI Emerging Markets ETF IEMG, Schwab Emerging Markets Equity ETF SCHE and SPDR Portfolio Emerging Markets ETF SPEM (read: Emerging Market ETFs Beating the Broader Market: Here's How).

Commodity ETFs

Commodity prices have remained steady on a favorable demand-supply scenario and a lower greenback. Invesco DB Commodity Index Tracking Fund DBC has gained 2.1% in the past month (as of Nov 8). Investors can also consider Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC, iShares S&P GSCI Commodity-Indexed Trust GSG, iPath Dow Jones-UBS Commodity ETN DJP and United States Commodity Index Fund USCI.