The equities market and stock exchange traded funds retreated in a violent start to a new year. As volatility dissipates, exchange traded fund investors should consider areas where selling may have been overdone.
“In our opinion, much of the recent selling has been overdone and, as such, has created some bargains,” Russ Koesterich, Global Chief Investment Strategist and Head of the Model Portfolio & Solutions Business at BlackRock, said.
For instance, investors may take a look at the developed Japan where fears of a hard landing in China pressured Asian markets and briefly sent Japanese equities into a bear market.
“Despite the recent volatility, we remain constructive on Japanese equities, particularly as the latest selloff has returned some value to that market,” Koestrich said.
Investors can use the iShares MSCI Japan ETF (NYSEArca: EWJ) to track Japaneses markets. EWJ is trading at a 15.0 price-to-earnings ratio, compared to the S&P 500 Index’s 17.2 P/E.
However, with speculation of increased central bank intervention to lift the flagging economy, investors may be exposed to currency risks. Consequently, people may consider currency hedged ETFs, which diminished the negative effect of a weaker yen currency or stronger U.S. dollar. Currency-hedged Japan ETF options include the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP).
In the U.S. markets, Koesterich likes the financial sector as Wall Street banks see an improved outlook.
“Closer to home, one of the few bright spots last week was the U.S. financial sector,” Koesterich added. “Although earnings overall have been lackluster, financial companies, notably Morgan Stanley, JPMorgan and Bank of America, are producing better-than-expected results. With financial stocks getting hit hard over the past several weeks, we see this as another place for investors looking to bottom fish to consider.”
For broad financial sector exposure, investors can look to the iShares U.S. Financials ETF (NYSEArca: IYF), Financial Select Sector SPDR (NYSEArca: XLF) and Vanguard Financials ETF (NYSEArca: VFH).
These diversified financial sector ETFs include positions in the biggest banks on the block. For instance, IYF holds 1.1% Morgan Stanley (NYSE: MS), 5.9% JPMorgan Chase & Co. (NYSE: JPM) and 3.8% Bank of America (NYSE: BAC). The banking sub-sector makes up about a third of the financial sector ETFs’ holdings.
Max Chen contributed to this article.