2. Most investors are unprepared for rising interest rates: It’s not surprising investors are ignoring the warnings on the dangers of rising interest rates. They hear it every year, and every year the experts are wrong as Treasury yields march lower to extend a 30-year rally in bond prices. Nervous investors have piled into fixed-income mutual funds and ETFs in the wake of the financial crisis. They are set up for big losses if rates rise and bond prices fall in the U.S. Investors can protect themselves somewhat with floating-rate ETFs and funds that invest in international bonds. Emerging market debt ETFs such as iShares Emerging Markets High Yield Bond Fund (NYSEArca: EMHY) and iShares JPMorgan USD Emerg Markets Bond (NYSEArca: EMB) are paying attractive yields.
3. China outperforms in 2013: Most of last year was tough for China ETFs such as iShares FTSE China 25 Index Fund (NYSEArca: FXI) on economic “hard landing” worries although they have turned on the gas since September. I expect China ETFs to outperform developed markets in 2013 as the global economy continues to improve and Chinese leadership provides more market-friendly stimulus. China ETF Flirts with 52-Week High]
4. 2013 is the year of the commodity ETF: Some agriculture ETFs soared over the summer due to the historic drought, and gold wrapped up its 12th straight up year in 2012. However, investors in diversified commodity ETFs have been disappointed recently. For example, PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) has lagged the S&P 500 four straight years. However, the trend could reverse in 2013 if oil and gold heat up, and the U.S. dollar gets pushed lower by U.S. deficits and Federal Reserve stimulus. In any case, a small allocation to commodities can help diversify a portfolio of stocks and bonds.
5. Cyclical sectors outperform: In the U.S., I like the more cyclical sectors such as financials, consumer discretionary and technology heading into 2013. I’m less enthusiastic about traditionally defensive sectors such as utilities and consumer staples. Clearly, this reflects my view that the U.S. economy will continue to improve this year.
Full disclosure: Tom Lydon’s clients own EMHY, EMB, DVY.