Professional investors often use exchange traded funds to express a tactical view, such as those that are seen with various sector rotation strategies.
ETFs have also proven particularly useful for investors looking to exploit isolated themes. Whether it is profiting from social media stocks, biotechnology drug approvals or the emerging markets consumer, there is no shortage of thematic ETFs on the market today. Some investors and strategists even opt to blend tactical and thematic usage of ETFs. [Tactical Trend Following With ETFs]
“Tactical ETF asset managers employ various tools to make regular changes to their strategies. Some focus on quantitative factors or technical analysis, others macroeconomic factors and still others employ a more fundamental approach. However Horizon Investments combines these three disciplines in managing their AAA Focus ETF Strategy,” said S&P Capital IQ in a new research note.
One theme that has caught Horizon’s eye is rampant monetary easing by central banks that are not the Federal Reserve. Looking to capitalize on that theme, the firm’s lone Asian holding is the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), the largest currency hedged ETF and second-largest Japan ETF.
DXJ, which S&P Capital IQ rates overweight, “holds dividend-paying securities that derive the vast majority of their revenues from outside of Japan. From a sector perspective, consumer discretionary and industrials stocks are well represented compared to other Japanese ETFs,” said the research firm in the note.
While 2014 has not been kind to Japanese stocks, the yen’s recent struggles against the U.S. dollar have reminded investors about the advantages, which were on full display in 2013, of hedging yen exposure when the Japanese currency is weak. DXJ is down about 5.8% this year while the iShares MSCI Japan ETF (NYSEArca: EWJ) is down 8.6%. [Good Days for Currency Hedged ETFs]
Horizon also takes a tactical and thematic approach to the financial services sector, both with the firm’s U.S. and overseas holdings. For example, Horizon opts for the iShares MSCI Europe Financials ETF (NasdaqGM: EUFN) as a way of accessing Europe rather than a broader Europe ETF with a large financial services sector allocation.
The firm uses EUFN “to benefit from the “free money” being supported by European Central Bank activities. While focused on just one sector, the ETF is relatively diversified across European markets, with 75% of assets spread across banks and insurance companies in the United Kingdom, Spain, France, Switzerland and Germany,” said S&P Capital IQ.
In the U.S., Horizon opts for the SPDR S&P Bank ETF (NYSEArca: KBE) over traditional financial services ETFs that are arguably excessively allocated to money center banks. KBE is an equal-weight ETF, allocating no more than 1.81% of its weight to any of its 61 holdings.
Rated marketweight by S&P Capital IQ, KBE’s 72.3% allocation to regional bank positions the ETF nicely to thrive if interest rates rise. The ETF has a 0.35% expense ratio and trades with a tight $0.01 bid/ask spread.
The Horizon strategy also focuses on how companies’ increased adaptation of technology can boost the U.S. economy. The firm uses the PowerShares QQQ (NasdaqGM: QQQ) and the iShares S&P 500 Growth ETF (NYSEArca: IVW) for that exposure.