8 ETFs to buy to play 5 macro trends

This summer is shaping up to be one where macroeconomic trends will bulk large. Elvis Picardo, vice president, research, as well as portfolio manager, at Global Securities in Vancouver, identifies five of those  trends and offers 8 exchange traded funds that, given their broad focus and high levels of liquidity, are particularly well suited to profit from these macroeconomic trends.

This summer is shaping up to be one where macroeconomic trends will bulk large.

But this isn’t necessarily bad for all types of investments. Consider exchange-traded funds. Given their broad focus, they’re particularly well-suited to profit from macroeconomic trends.

They’re also highly liquid. In addition, they generally show narrow trading spreads.

True, the biggest question for investors earlier this year was the exact day when the U.S. Federal Reserve would issue its first interest rate hike since 2006.

But such speculation has become tiresomely predictable. If there’s weak data that may stay the Fed’s hand, say the pundits, then investors should buy U.S. stocks.

Yet if there’s strong data that keeps the Fed on course to raise its rate in September, or in the fourth quarter, investors should sell U.S. stocks. Rinse and repeat, right?

But in recent weeks, several themes that have preoccupied markets on and off for the past few years have once again come to the fore. And Canadian investors who can stomach risk should take advantage of them.

By doing so, they can offset some of the weakness in the S&P/TSX Composite — no small matter, given the index’s decline of 3.2 per cent over the past 12 months.

In fact, the Composite has been one of the worst performers of major equity benchmarks worldwide.

And with Canada’s economy having shrunk in the first four months of this year, it may be increasingly difficult for the Composite to make a convincing recovery.

Even the International Monetary Fund says we’re in trouble. In a recent update, that body slashed its growth estimate for Canada’s gross domestic product for 2015 by 70 basis points to 1.5 per cent, the biggest downward revision of all the countries it surveyed. True, Canadian investors have taken it on the chin from the plunge in oil and commodity stocks. But the fall has been partly offset by these folks’ holdings in the U.S.

Not only are U.S. stock indexes now trading near their all-time highs, but returns on American equities have been magnified by the loonie’s current six-year low.

So, with the TSX Composite floundering and U.S. equities looking very pricey, investors should look abroad where some big themes are now playing out.

Theme No. 1? A rebound in Europe, regardless of whether Greece stays in the euro zone or leaves.

Although Greece has recently hogged the headlines, Europe has continued to recover.

For example, the IMF believes the Euro zone economy will grow 1.5 per cent this year, 1.7 per cent the next. By contrast, it grew only 0.8 per cent in 2014.

Growth is being fueled by the European Central Bank, which unleashed a trillion-euro stimulus program back in January.

Meanwhile, the signing of a last-minute bailout deal between Greece and its creditors has greatly reduced the odds of a “Grexit,” although Athens still has to surmount several hurdles before the all-clear can be sounded.

Nonetheless, there are only a few signs that Greece’s financial sickness will spread to other heavily indebted members of the Euro zone, such as Spain and Italy.

Best exchange traded funds for European growth

Canadians who want exposure to Europe should consider buying the BMO MSCI Europe High Quality Hedged-to-CAD ETF (TSX─ZEQ). As its name implies, the fund is hedged to the loonie.

The ETF’s top geographic allocations are the U.K. (40 per cent), Switzerland (23 per cent) and Germany (10 per cent).

Its top five holdings are Novo Nordisk (NYSE─NVO), the Danish pharmaceutical giant; Novartis Intl. AG (NYSE─NVS), a Swiss version of Nordisk; Roche Holding AG (OTC─RHHBY), another Swiss pharmaceutical giant; Nestle SA (OTC─NSRG) the Swiss food multinational and British American Tobacco PLC (NYSE─BTI).

Another Europe-based exchange traded fund is the Vanguard FTSE Developed Europe Index ETF (TSX─VE).

Although not currency-hedged, the fund is more geographically diversified than its BMO rival.

Its top geographic allocations include the U.K. (28 per cent), Switzerland (15 per cent), as well as both France and Germany, each of which account for 14 per cent.

Keep in mind that the benchmark stock indexes for both France and Germany have risen more than 17 per cent since the beginning of the year.

By contrast, the benchmarks for Switzerland and the U.K. have inched up just four and three per cent, respectively.

But what about contrarians who see Greece bouncing back? They could buy the Global X FTSE Greece 20 ETF (NYSE─GREK), which tracks Greece’s big caps. Still, with a one-year return of negative 50 per cent, this fund is hardly for the faint of heart!

Theme No. 2? The euro continues to fall.

As many market watchers already know, the euro, over the past 12 months, has plunged 19 per cent against the greenback.

Not only is the euro being driven lower by uncertainty over Greece, it’s being pulled down by the difference in monetary policy between Europe and the U.S.

While Europe, as noted, has launched a program of quantitative easing, the U.S. has wound down its version thereof. Indeed, the Fed could tighten its monetary policy later this year.

Not only could this lead to a widening yield between U.S. and European financial assets, it could force the euro even lower.

Best exchange traded fund to hedge the euro

If you’re still interested in the euro, but don’t want to buy foreign exchange contracts or currency futures, consider the Euro Currency Trust (NYSE─FXE), which reflects the euro’s price.

Although ETFs like this one aren’t the most efficient way to trade currencies, they are suitable for trading smaller amounts.

Theme No. 3? Continuation of market volatility in China.

Although the Shanghai Composite Index soared 150 per cent in the 12 months to June 12, it plunged 33 per cent over the next four weeks.

The US$3.6 trillion in market value that was subsequently wiped out is unprecedented not just for its magnitude, but for the rapidity with which it occurred.

To stem the tide, China has banned big shareholders from selling their stakes.

It’s also ordered state-run institutions to buy stocks, while permitting more than half the companies on mainland exchanges to halt the trading of their shares.

Whether these measures will work remains to be seen, but volatility in Chinese markets may continue unabated, if panic selling continues.

Best ETF to play volatility in Chinese market

To track Chinese companies that trade on either the Shanghai or Shenzhen exchanges, investors should buy the Deutsche X-Trackers Harvest CSI China A-Shares ETF (NYSE─ASHR).

The fund, popular with North American investors, follows the CSI 300 Index, which consists mainly of Chinese big caps.

Theme No. 4? The lifting of sanctions on Iran.

On July 14, as most everyone knows, Iran inked a deal that will curb its program to build nuclear bombs. In exchange, the West is lifting its sanctions.

Because Iran boasts the world’s fourth-biggest reserve of crude oil, the deal will likely have an immediate effect on petroleum prices.

Indeed, prices for crude plunged 12 per cent in the first two weeks of July, as bearish sentiment built over Iran possibly exporting one million barrels of oil within six months of the sanctions being lifted.

Still, some pundits say Iran could take up to a year to ramp up its exports since it must first show compliance with the deal. Moreover, the country needs to revive its aging energy infrastructure.

Long-term investors, who can ride out short-term volatility in oil, may find it easy to accumulate positions in baskets of oil and gas stocks. Other investors should consider exchange traded funds.

Best exchange traded funds for Iranian recovery

Two top energy ETFs in Canada are the iShares S&P/TSX Capped Energy Index ETF (TSX─XEG) and the BMO S&P/TSX Equal Weight Oil & Gas Index ETF (TSX─ZEO).

The iShares fund buys companies on the S&P/TSX Canadian Energy Index — and does so based on their weightings.

Its three biggest holdings are Suncor Energy Inc. (TSX─SU) at 22.4 per cent, Canadian Natural Resources Ltd. (TSX─CNQ) at 16.1 per cent and Cenovus Energy Inc. (TSX─CVE) at 6.7 per cent.

BMO’s top three holdings, each of which accounts for slightly more than eight per cent of the fund, are Imperial Oil Ltd. (TSX─IMO), Enbridge Inc. (TSX─ENB) and Pembina Pipeline Corp. (TSX─PPL).

Theme No. 5? India surpassing China.

It’s not a fantasy. Both this year and next, India, predicts the IMF, will be the world’s fastest-growing economy, expanding at 7.4 per cent annually. China, by contrast, will grow 6.8 per cent this year, 6.3 per cent the next.

Best ETF for growth of Indian economy

With the Excel India Growth & Income Fund (TSX─EGI-UN), Canadians now have a relatively new way to invest in India.

Although a closed-end fund, the Excel product is expected to convert to an open-ended mutual fund in May 2017.

The fund, which completed a $72-million initial public offering in late May, invests in Indian stocks and investment-grade corporate bonds. Its initial distribution yield is targeted at four per cent.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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