“Of the betas, emerging-markets equities are among the cheapest,” Lee said. “They yield about 3% and have the potential to grow their dividends at a decent clip.”
Emerging market ETFs have been underperforming compared to the U.S. markets so far this year. The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is down 10.0% year-to-date and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) declined 9.4%, whereas the S&P 500 Index has gained 19.8%. [Technical Signs Point to Emerging ETF Rotation]
Lastly, cash can be put to use in “alphas,” or excess returns generated from skill-based strategies that take advantage of relative mispricings. For instance, investors can pick out actively managed ETF strategies, along with passive “enhanced” or “smart-beta” index ETFs that follow active styles, such as fundamentally weighted or equal-weight index ETFs. [Some Outperforming ‘Smart-Beta’ ETFs]
“If you have an edge, you should be exercising it as aggressively as possible, regardless of the expected returns of betas,” Lee said. “If you don’t, then you should avoid alpha bets.”
For more information on investing in ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own EEM.