As investors take a hard look at their investment portfolios to potentially rebalance positions for the year ahead, people may consider exchange traded funds to better capture value and diversify across the global market.
The markets have seen benchmark equity indices flatten out after a multi-year rally, U.S. Treasury yields stubbornly hold on to record low levels, the U.S. dollar strengthen against foreign currencies and crude oil prices plunge over the past year.
On the recent webcast, The Big Picture: Year-End Review and 2016 Outlook, Ron Saba, senior managing director of investment and CIO for Horizon Investments, pointed out that U.S. markets have been meaningfully outperforming international markets ever since the Federal Reserve enacted its unprecedented loose monetary policy.
However, after the impressive growth spurt in the U.S., valuations at home are beginning to look pricey, whereas international valuations remain low. While investors may see a more attractive value play overseas, people will still have to contend with currency risks, notably a strengthening U.S. dollar.
“Dollar appreciation contributed to international equity underperformance,” Saba added.
Nevertheless, investors may still enjoy some growth at home. John Eckstein, chief investment officer at Astor Investment Management, said that his firm’s proprietary Astor Economic Index, which analyzes data indicators tied to the economy, currently shows that while we have fallen off from strong growth at the start of the year, the index still suggests U.S. markets could experience above average growth.
Jim Ferrin, chief investment officer at Quantitative Advantage, also pointed out that U.S. large growth stocks currently show higher momentum than U.S. large value stocks. Looking at overseas markets, Ferrin noted that developed market Europe, Australasia and Far East stocks, especially small-cap EAFE stocks, are exhibiting greater momentum than the emerging markets, which have seen their momentum indicators decline over the past couple of weeks.
With the year end just around the corner, investors may begin fine-tuning portfolio positions and even capitalize on tax-loss harvesting.
“As year-end looms, many investors may start to look at their portfolios with an eye to their taxable gains and losses,” Theresa Brennan, ETF regional vice president at Deutsche Asset & Wealth Management, said. “Losses can have real economic benefits in their own right – specifically, they can be used to offset gains made in other investments, potentially lowering an investor’s overall tax liability if properly managed.”
For instance, ETF investors who want capture potentially more attractive markets overseas may take a look at currency-hedged ETFs to diminish the negative effects of a strengthening U.S. dollar or weaker foreign currencies.
For instance, investors can consider country-specific picks like the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) and Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR), or broader strategies like the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU).
DBJP tracks an MSCI Japan index that hedges against a depreciating Japanese yen currency. The yen-hedged Japan ETF includes a large tilt toward consumer discretionary at 22.0%, with top holdings including automobile manufacturers Toyota Motor 5.9% and Honda Motor 1.8%.
DBGR follows an MSCI Germany index that hedges against a weaker euro currency. Consumer discretionary makes up 21.0% of the ETF’s index with Diamer AG at 7.2% among the fund’s largest holdings. Bayer is the largest component, making up 9.3% of DBGR’s underlying portfolio, and the healthcare sector accounts for 15.0% of the portfolio.
DBEU takes a broader approach, tracking the MSCI Europe US Dollar Hedged Index. The Europe ETF’s top country exposure includes the U.K. 30.0%, France 15.0%, Switzerland 14.5%, Germany 13.9% and Spain 5.1%.
Financial advisors who are interested in hearing more about the market trends can listen to the webcast here on demand.