As the U.S. looks for opportunities in an extended market run, investors may turn to smart beta exchange traded funds that selectively screen for factors to help people manage risks and still capture upside potential.
ETF Trends publisher Tom Lydon spoke with Arne Noack, Director of ETP development Group at Deutsche Asset Management, and Rob Bush, ETF Strategist at Deutsche Asset Management, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk market opportunities with alternative index-based ETFs.
“What we can see in some of our strategies, and since Trump was elected, is the smaller, mid-sized companies have really taken off,” Noack said. “Even this year, we don’t’ really see that trend ending so far.”
Investors who want greater exposure toward smaller companies can look to the Deutsche X-trackers Russell 1000 Comprehensive Factor ETF (NYSEArca: DEUS), which screens for Russell 1000 components based on five factors of quality, value, momentum, low volatility and size. Due to its smart beta indexing methodology, the underlying index focuses more on mid-sized companies – market capitalization weights include 60.1% mid-cap and 30.4% large-cap.
Additionally, with Donald Trump in office and the Federal Reserve looking to hike interest rates in response to solid growth and potential expansionary policies, the U.S. dollar will strengthen against foreign currencies. Consequently, investors who want international exposure will have to keep in mind currency risks ahead.
“When you analyze dollar strength, what I mean, for international currencies, you sort of have to look at the big international currencies,” Bush said. “If you’ve got dollar strength, we’re going to be forecasting weakness. In euro/dollar, you’re actually going to parity; dollar/yen to 120; with the pound, a little bit more weakness still to come – maybe going out to 118. Those are all forecasts of further depreciation from here.”
Consequently, investors may turn to currency-hedged international stock ETFs to gain exposure to the underlying markets while mitigating the foreign exchange risks, notably the negative effects of a depreciating foreign currency on an investor’s investment.
For example, investors can look to the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK).